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Key to Problems 

IN 

PRINCIPLES OF ECONOMICS 

(EIGHTH EDITION) 



s^^ By 

Fm/TAYLOR, Ph.D. 




NEW YORK 
THE RONALD PRESS COMPANY 

1921 



6' 



f?.. 1^ 



Copyright, njJi, by 
TiiK Ronald Press Company 

.]// Riijhls Reserved 



OCT 221921 ©C1A628058 



"VIO \ 



3 PREFACE 

Since it is probable that some persons will look on the supplying 
of a key to the problems of my text as quite unnecessary, not to say 
impertinent, I here note the considerations which seem to me decisive 
in favor of the policy adopted. First, it is always possible that the same 
problem should quite legitimately be interpreted and answered in more 
than one way. But, secondly, it is very important that each problem 
should be interpreted in just one way, that is, the way fitted to bring 
out the point ivhich it was designed to illustrate. Again, it is very im- 
portant that, throughout any particular class, the method of interpret- 
ing and answering a given problem should be uniform, a condition 
which, in case several different persons are teaching different sections 
of that class, will not be realized as a matter of course. Finally, the 
best device for insuring the presence of these two conditions, namely, 
an appropriate interpretation and answer and a uniform interpretation 
and answer, seems to be the well-tried one of a key prepared by the 
author himself. 

Fred M. Taylor 

Ann Arbor, Michigan 
August 15, 1921 



KEY TO PROBLEMS 
PRINCIPLES OF ECONOMICS 

Pages 4-5 
Problem 1 

The first statement means that lumber as such, lumber as a kind 
of thing, is more important to us than oxide of lead. This is plainly 
true, because the lumber is essential to having the house at all, while 
the paint is necessary merely to having the house in an especially de- 
sirable state. 

The second statement means that a given quantity by weight of 
lumber can be spared with less disadvantage than an equal quantity of 
oxide of lead. We should experience less inconvenience if we lost the 
former than if we lost the latter. The reason is that a hundred pounds 
of lumber are much easier to get (to produce) than an equal quantity 
of oxide of lead. 

Problem 2 

Effective importance is importance which really counts, in the sense 
that it calls on us to regulate our conduct with reference to it. It may 
do this for any one of several reasons. Thus, in some cases our action 
is necessary to produce the good in question, using "produce" in the 
ordinary sense. Again, in case we cannot produce the good and hence 
are not called on to do so, we need to take care of it after it has come 
into our possession, economize in its use, etc. No such condition of 
effective importance can be present in the case of rain or sunshine for 
the simple reason that these goods are completely independent of our 
ivills. Though we have ample motive for making sacrifices in order to 
have these goods or get rid of them, such action is not feasible. These 
goods, therefore, cannot be conduct-determining, hence cannot have 
effective importance. 

Problem 3 

This is very common stuff, but very silly. The way in which we 
look at things on the "verge of oblivion" no more gives their true, their 
real, proportions, than does the way we look at them at any other time. 
The real, true, comparative significance of things is determined by the 
totality of conditions which actually prevails. Under the conditions 
named in the quotation, the important things were undoubtedly food and 
v^^ater. Under those conditions, these were of infinitely greater im- 

I 



2 PAGES 4-5; 7-8 

portance than anything else. But. in the midst of a nornial community 
where food and water are abundant, these are not the most important 
things. Relative importances have been fundamentally changed. 

Pages 7-8 
Problem 1 

Unless a thing has utility, capacity to satisfy some want of ours, 
we should not be willing to give something else which we desired in 
exchange for that thing. That is, it would not fulfil the condition just 
laid down as necessary under the present order : it would not possess 
exchange value. 

It may well be added that such a thing would not fulfil the general 
conditions earlier brought out. That is, it would not have even generic 
importance. Unless things have the capacity to satisfy our wants, they 
manifestly have no importance at all for us. Remember, however, that, 
though a thing must have utility if it is to be an economic good, still hav- 
ing utility will not necessarily make that thing an economic good. It must 
have effective utility, effective importance. 

Problem 2 

A thing in order to be wealth must be appropriable ; for, unless a 
man could take exclusive possession of a thing, he would be unable to' 
oblige us to give him something in exchange for it. A,gain, a thing to 
be wealth must be transferable ; since, unless the person now in pos- 
session of a thing could relinquish possession of it and give us posses- 
sion of it, we should not be willing to give him anything" for it, and so 
it would not have value. 

Problem 3 

Such water is not ordinarily wealth. It could be appropriated, but 
has not been. Hence persons desiring to get it are not obliged to re- 
linquish some desirable object in exchange for it. 

Problem 4 

An amiable disposition is not wealth ; for it obviously could not 
be transferred. The gold on the surface of the moon is not wealth, to 
us anyhow ; for it could neither be appropriated by any one of us nor 
transferred from one of us to another. A vein of coal not known to 
be in existence would not be wealth ; since, of course, no one would be 
willing to give anything for it unless he knew about its existence. 

Problem 5 

The result of the labor expended in pasting circus posters on the 
houses of Washtenaw avenue would not be wealth. The point to be 



PAGES 7-8; 21-22 3 

made is that the mere cxpc-ndititrc of labor docs not bring wealth into 
existence. The results of that labor must be desirable, and also must 
possess vakie. 

Problem 6 
The error in the quotation is in supposing that the stone lacks 
utility — is not useful. To the economist utility means, not necessarily 
capacity to satisfy certain fundamental, necessary wants, but capacity 
to satisfy any zvants wJiatever. Now, the stone in question surely pos- 
sesses this capacity : — the collector has some desire which the posses- 
sion of this stone gratifies, or he would not give anything for it. 

Problem 7 
No, this does not imply that the possessions of the poor man are not 
wealth. Anything is wealth which has value. And whatever goods of 
this sort the poor man possesses, however few, constitute wealth. 

Pages 21-22 
Problem 1 

Examples of autonomous production are furnished by the woman 
preparing her own food, making her own garments ; the man blacking 
his shoes, shaving himself, and so on. 

Problem 2 

The point of these sentences is that Crusoe's economic life was 
autonomous. He did not cooperate with other men in respect to 
economic matters. There was no specialization involved. 

Problem 3 

This means that the remuneration in the former employment falls 
off while at the same time in the latter it rises, and consequently self- 
interest leads people to leave the former occupation to go into the latter, 
or anyhow leads the younger generation who are choosing their occupa- 
tions to choose the latter rather than the former. Illustrations of this 
are common in everyday life. When a new occupation arises, as tele- 
graphy did fifty or sixty years ago, a great many young men go into 
it for the exceptionally high wages that are paid. But very soon this 
intensity of competition brings down the price of the service involved 
to figures as low as, or lower than, those in similar occupations; and, 
in consequence, the movement is checked or even reversed. 

Problem 4 

The great advantage of foreign trade, as already pointed out, is 
that it brings about cooperation between us and other people, and hence 
insures greater productivity, and so more products and better products 



4 PAGES 21-22 

for all. The sort of thing said in the quotation is misleading, because 
it implies that surpluses come into existence of their own accord instead 
of being the result of the deliberate choice of a special vocation. Doubt- 
less there are cases where surpluses appear by accident ; and, in those 
cases, it is of real advantage that we have a foreign trade where we can 
dispose of such surpluses and get in exchange something which is more 
wanted. But this is surely a minor advantage of foreign trade. 

Problem 5 

Under the circumstances indicated a communistic society would by 
the direct exercise of its authority cut down everybody's consumption 
of potatoes for the current season. Under the present order, the price 
of potatoes automatically rises from thirty or forty cents to eighty or 
ninety cents ; and, in consequence, there is automatically brought about 
a general curtailment of consumption at this point. 

Problem 6 

This is so obviously imtrue that one finds difficulty in understand- 
ing how anyone could believe it, yet a great many people do believe it, 
or, anyhow, profess to. Plainly, it will pay us to buy a thing from- 
others even if we can produce it ourselves, provided we can get it more 
cheaply by producing something else and using that something else to 
buy the first thing. Perhaps the best way to make the student see this 
is to illustrate it with some commodity which we could produce but 
only under great disach'antages. e. g., bananas, oranges, etc., in Michigan. 
Of course we could produce these, but only under glass; and the most 
hide-bound protectionist would admit that the operation would not pay 
the nation at large. 

Problem 7 

Prices control, regulate, our economic action. That, in general, 
prices which are freely determined do this regulating of our economic 
action better than would prices which are consciously fixed by authority 
— this proposition is assumed in our maintenance of the present order. 
It follows that every time we fix prices by authority we run the risk of 
setting up a regulator which will do a poor job, will regulate our action 
wiiviscly. As far as possible, then, we should leave prices to be deter- 
mined without interference. "Do not meddle with the thermostat.'" 
If, now, we are dissatisfied with the results reached in a particular 
case, we are less likely to cause the evil consequences which we fear 
if we make use of corrective processes rather than prophylactic ones, 
that is, processes which interfere at the outset, which consciously change 



PAGES 21-22 5 

the price to which is committed the regulation of economic action. The 
principal reason for this^ perhaps, is the fact that the undoing of any- 
thing that has been done, the neutrahzing of tendencies already set up, 
is naturally a less complete process than would be hindering those tend- 
encies from being set up at all. It follows that, by using the corrective 
method, we are more likely to limit the effects of our interference to those 
particular consequences of the original price which we really desire to 
shut out. 

The above reasoning is well illustrated in those cases where prices 
seem unbearably high from the standpoint of the public welfare. The 
direct method of meeting this case, and the one most commonly favored 
by the thoughtless, is to fix a maximum price. Now, even if we admit 
that some cases can best be provided for in this way, this is in general 
seriously objectionable for the reason that it tends to produce a scarcity 
which is bound to increase very greatly the underlying difficulty against 
which we are fighting. For holding down a price by a legal maximum 
cannot help taking away one most powerful stimulus to the increase of 
production and is even very likely to cause the diminution of such 
production. If now, instead of resorting to the maximum price policy, 
the government chooses the alternative of corrective action, such tend- 
ency to check or diminish production will be eliminated or reduced to 
very small dimensions. Thus, the government may buy up supplies 
with public funds and resell to the classes specially injured by the high 
price at a much lower price. In doing so. it obviously will bring the 
needed relief; while, on the other hand, it will not in any considerable 
degree tend to cut down production. Doubtless the burden of providing 
public funds to make up the deficit resulting from the policy outlined 
will fall in some measure on the producers immediately interested, and 
so far will discourage production in this field. But. since the necessary 
taxes will have to be levied in accord with some general rule affecting 
large classes of persons rather than just the individuals engaged in the 
one business, the actual burden borne by these persons will be but a 
very small part of the total and therefore will constitute but a small 
proportion of their profits. The tendency, therefore, of the new policy 
to discourage production in the particular field concerned would probably 
prove almost negligible. 

Problem 8 

A first undesirable consequence of such a working of things is to 
produce a strong tendency for labor to go into the particular industry 
involved in preference to others, and so a tendency to make the supply 



-6 PAGES 21-22; 29-30 

in that field excessive and that in other fields scanty. Doubtless, in the 
case of industries which are freely competitive, this tendency cannot 
permanently cause a great dislocation of the labor power of the com- 
munity, since the excessive supply of labor tending to appear in this 
field will in the long run be unable to find employment and hence will 
be obliged to turn to other fields. But this corrective process will take 
a long time and will involve many inconveniences and considerable 
suffering. 

Again, the increased cost due to the excessive rate of wages sup- 
posed will inevitably lead to a higher charge for the commodity or 
service produced, which in turn means increased cost and so higher 
prices for other products dependent on this particular industry. Thus, 
if because of increased wages cost the price of transportation service 
goes up, the price of meat, coal, iron, etc. will almost necessarily go up. 
That is, we cannot attain a particular desired end by such arbitrary 
interference without entailing remoter consequences to which we should 
very strongly object. 

Again, if, as in the case of railway transportation, the industry 
involved is under public control so that the fixing of the price of service 
produced requires the consent of legislatures or courts or commissions, 
the proper readjustment may be delayed a long tme, and in consequence 
the efficiency of the industry may become greatly impaired. 

At best the spectacle of excessive pay in the one particular field is 
likely to cause discontent in other fields and so a demand for interference 
in these other fields until all regulation of economic action becomes a 
public, arbitrary process, certain to fail of reaching satisfactory results. 

Pages 29-30 
Problem 1 
Surely not. Orange growers are obviously like units. The present 
order assumes that such like units compete against each other. This 
of course excludes their acting concertedly in the sale of their products. 
The case is the same with the grain raisers when buying supplies. 
They are like units — this time on the buying side. As such, they ought 
to compete rather than combine. 

Problem 2 

Obviously not. Sympathy with the classes which have to be satisfied 
with small incomes and demagogic fear of the mass vote make people 
act and talk quite inconsistently in respect to this matter ; but, from the 



PAGES 29-30 7 

theoretic point of view, the case is no different from that of tlie oil trus^. 
Collective bargaining of all the roads with all the men would be 
quite inconsistent with the principles of the present order. Prima facie. 
it would be fairer than the former plan, since the unfair combining of 
the laborers would be more or less offset by the equally unfair combin- 
ing of the employers. 

Problem 3 

The comments above quoted overlook the natural consequences of 
free competition. That condition being assumed, we can depend on the 
self-interest of the producer to eliminate restrictions 'on output; for, 
however reasonable restrictions may seem, abstractly considered, each 
producer will be disposed to believe that his particular interests will 
best be served by the opposite policy. This conclusion he will reach 
whether he expects other producers to practice the restrictive policy 
or the reverse. If they do practice that policy, he would profit from 
not limiting his output, since he would on that plan get both the benefit 
of the high price caused by the restrictive policy of others and the 
benefit of the largeness of his own output. If others did )iot pursue the 
restrictive policy, he would profit by following their example, since he 
could not hope by himself to produce any material limitation of the 
total output and so could not hope to raise price in any material degree, 
while, by making his output as large as possible, he would in some 
degree offset the inevitable lowering of price. Restricting output in 
order to raise price is practicable only when there is a monopoly or any- 
how an almost complete combination of competitors, that is, when com- 
petition is not free— a condition which the present order assumes to be 
unfulfilled, and one which certainly is unfulfilled throughout much of 
production, particularly in the industry of farming to which the remarks 
quoted were applied. It may be added that, if the reasoning involved in 
the quotation were sound, we should long ago have had the condition 
of things predicted ; for the fact that cutting down the total output will 
raise price is a discovery which was made as soon as we got out of the 
Garden of Eden. 

Problem 4 
So long as competition remained free, the presence of exceptional 
profits in the middleman's field would lead to the transfer of capital and 
enterprise from other fields of production to this one, a process which 
of. course would go on till profit difference had been eliminated. 



8 PAGES 34-35 

Problem 1 

(a) If you sell directly to customers, you will be obliged to make 
a great many sales instead of a few as in the case of selling to dealers. 
This will mean spending a lot of time as well as performing a lot of 
work going from house to house finding customers and delivering the 
goods. Again, you will have considerable trouble measuring out the 
goods, making change, carrying the goods to the place of storage, etc. 

(b) Selling fruit directly to customers in places to be reached only 
through the parcels post will, as before, mean a lot more of labor and 
trouble makiiuj sales. Again, preparing for shipment in many small 
parcels will meah a lot more work and trouble. There will be a much 
greater chance of loss from dishonest customers, since consumers will 
have much less sense of responsibility than dealers. Customers who 
are not bad enough to refuse payment altogether will be very likely to 
insist that the goods are not up to standard and so that they are not 
under obligation to pay the price agreed upon. The chance of loss in 
transportation will be much greater with many packages than with a 
few. Doubtless other considerations could be added to these. 

(c) These facts are of course inconsistent with the notion 
that middlemen are mere parasites upon industry. They are performing 
services that have to be performed in bringing the original producer 
and the ultimate consumer together They are overcoming real obstacles 
to the gratification of human wants. In doing these things, they are, 
of course, producing. 

Problem 2 
The reason given for affirming that internal commerce does not 
increase wealth is without any weight whatever. It would be just as 
reasonable to say the manufacturer does not increase the wealth because 
he merely changes the form of things; or that the railway does not 
increase the quantity of wealth because it merely changes the location 
of things. All that anybody does is to change the relation of things in 
such a way as to make them more useful to man than they were. Now, 
commerce does this in a great many ways — and one of them is the way 
indicated, that is, the transferring of the goods from one person to an- 
other — bringing about a change of omnership. There are various forms 
of production : time-production, place-production, form-production — 
and so on ; and one of these is ownt-r.?/! //'-production — that is, bringing 
about a change of ownership from one person to another, e.g., from the 
man who produces to the man who consumes. This being a process 
which must be performed before satisfaction of wants is possible, pro- 



PAGES 34-35 9 

viding for it is truly a productive operation. When it has been done, 
wealth is greater than it was before. It is very important to make the 
student realize from the first that wealth is only a relative thing. The 
same thing may be wealth or not wealth according to circumstances; 
so it may be less wealth or more wealth according to circumstances. 
Vastly the greater part of the wealth existing at any moment is inchoate, 
incomplete. Any process which carries it a step further toward com- 
pleteness has increased the sum total of wealth. 

Problem 3 

From the economic standpoint, the "right price" is that price which 
correctly regulates our economic conduct. This definition naturally 
follows from the fact brought out above that under the present order 
the function of regulating our economic conduct is automatically as- 
signed to price. 

Problem 4 

Be sure to give this problem ample emphasis. The point to be 
made is constantly overlooked. The precise nature of the injury that 
would result from the supposed change is the diminution in the amount 
of cooperation and specialization zvhich has hitherto prevailed. If our 
foreign market showed a falling off of $200,000,000, our loss would be 
nothing like that sum. That loss would be merely the diminution in the 
total quantity of goods we could enjoy, because of the fact that we were 
obliged to give up in some measure the plan of confining ousselves to 
producing goods which we could produce with small expenditure and 
using said goods to buy from other countries goods which we could 
produce only with large expenditure. In other words, otir loss is merely 
the diminution in total income due to giving up the degree and kind of 
cooperation which we had formerly practiced. 

Problem 5 

Such a notion, logically carried out, would bring us to a purely auto- 
nomous economic system. That is, we should not trade at all and so 
should not specialize at all. For, of course, if we put the duty high 
enough, we can equalize costs however unequal at the outset. We can 
make the cost of getting Valencia oranges from Italy to northern 
Michigan as great as the cost of raising them in northern Michigan. 
Perhaps we ought to try to favor particular industries, and, in order to 
accomplish this, we perhaps ought to put a protective duty upon them 
equal to the difference in cost; but the implication of this speech that 
we should ahvays do this — that as a matter of course we should equalize 
conditions and produce everything at home — is very silly indeed. 



lO PAGES 34-35; 39; 42 

Problem 6 

This is bad reasoning at either horn of the dilemnia. The firm is 
not overcharging the householder nor is he underpaying the laborer. 
The householder, on the one side, is getting more than the repairs which 
the journeyman plumber is making. He is getting these repairs made 
without having been obliged himself to hunt up the journeyman, get 
together the materials and tools for doing the work, and so on. On the 
other hand, the journeyman who does the work is not making all the 
sacrifices involved. He does not have to manage the business in general ; 
he does not have to keep an expensive stock of materials, tools, and so 
on ; he does not have to assume a lot of debts many of which may turn 
out bad; he is paid promptly and certainly the amount which is agreed 
upon ; and so on. 

Problem 7 

The rise of price in the case of failure in tlie wheat crop would be 
of social advantage in that it would lead to curtailment of consumption 
all aPong the line; and so the stock would not be exhausted' the vei*y 
first thing, but would be spread over the whole period between the 
two crops. 

Problem 8 

The objection alluded to is that a protective tariff, in that it is 
intended to hinder our buying goods from other countries, is equivalent 
to doing away in more or less measure with the cooperation upon which 
our high productive efficiency is dependent. 

Page 39 
Weak governments could not protect us against lawless elements 
that sought to deprive us of the fruits of our economic effort. Tyran- 
nical governments and corrupt governments zvould not do so. Tyran- 
nical governments would rob us themselves ; corrupt gov&rnment would 
authorize others to rob us. 

Page 42 
Problem 1 
The justification for the general education of the masses which has 
commonly been emphasized in this country is that such education is 
necessary where the people rule in order that they may be fit to per- 
form this function wisely. 

Problem 2 
Remember that it is a fundamental feature of the present order 
that prices should constitute the chief regulator of our economic action. 



PAGES 42; 51-52 • n 

and that it is the assumption of the present order that freely determined 
prices are the right prices for this jnirpose. But wages constitute one 
of the prices which are charged with this function, since they constitute 
tlie price of the service of labor, a most important factor in production. 
W^ages, therefore, should never be meddled with unless this seems ab- 
solutely necessary. "Don't meddle with the thermostat." If you feel 
called upon on to increase the income of the laborer try to do it in 
some other way, some way which will not tend to interfere with the 
proper regulation of our economic action. 

Pages 51-52 
Problem 1 

I think it is fair to say that the concei)tion of "produce" held by a 
man who calls all middlemen parasites is the same as the broad one 
with which we have been dealing. If he merely meant that in some 
refined sense of the word produce it was not quite proper to call middle- 
men producers, he would have no occasion whatever for calling them 
parasites ; for a parasite certainly means someone who takes without 
giving in return. If, then, he makes parasite and non-producer syno- 
nomous, he must mean by non-producer one who contributes nothing 
and by producer one who contributes something. 

Problem 2 

If St. Thomas is a place where vessels can obtain coal, where they 
can be refitted, and so on, then St. Thomas is a place where contribu- 
tions are made to utilities, to the production of wealth, and, consequently, 
it is a producing island. 

Problem 3 

The playing cards of a gambler without doubt have utility, that is, 
they have the capacity to satisfy wants. They also have value and are, 
therefore, wealth. A diamond ring no doubt has utility, that is, it has 
capacity to satisfy wants. Remember that questions as to the moral 
character of the want are not germane from our standpoint. Anything 
which satisfies a want, good, bad, or inditTerent, has- utility. If, in 
addition, it is too limited in amount or has a cost of production, it also 
has value, and so, is wealth. 

Problem 4 

(a) The six dollars certainly does represent an advantage received 
by the borrower. He wishes to anticipate the provision of the future ; 
and the power to do so brings him some advantage, else he would not 
pay for it. 



N/ 



12 • PAGEGS 51-52 

(b) It would certainly seem as if the lender could reasonably be 
credited with the production of the service described, for he is respon- 
sible for bringing it into existence. 

Problem 5 

There is no essential difference in the contributions of the persons 
named. All anybody can do toward production is to change in some 
way the relations of the objects. Now, everyone of the persons named 
does this. The deliveryman changes their place ; and the groceryman, 
while contributing more or less to this same result, also helps to change 
the ownership of the goods, which is surely necessary to the final satis- 
faction of wants. 

Problem 6 

This is so thoroughly inconsistent and ridiculous that we can hardly 
believe that anybody was ever silly enough to say it. But- it is a literal 
quotation from an editorial in an Ann Arbor paper. Of course, the 
Chinaman could not be earning anything if he were not giving some- 
thing in return — that is, if he were not producing. The idea that he 
has not been a producer because he does not eat very much or because 
he carries away the pay for his services to some other country is too 
absurd for serious criticism. 

Problem 7 

(a) The wealth which I buy consists in the opportunity to occupy 
a seat in the concert room while the concert is being given. In other 
words, I buy a certain set of conditions, (b) The quartet did not 
produce wealth which I bought but produced only a part of it, which 
part, along with others, was assembled into the totality which I did 
purchase, (c) The person or company which is responsible for the 
giving of the concert produces the service which I purchase. In order 
to do this they hire the hall, provide for the lighting of it, and hire the 
services of janitors, ushers, and singers, and assemble all these into a 
totality which I and other people purchase. 

Problem 8 

(a) The quotation itself shows that the groups of persons named 
belong to the producing class in that it says they are necessary under 
the capitalistic regime. Anyone who performs any function necessary 
under a given order of things is, wider that order of things, a producer 
in the only reasonable use of the word producer. Doubtless any writer 
is privileged to employ a narrower definition of producer if he thinks 
best; but he must be careful not to indulge in any moral condemnation 



PAGES 51-52; 16-17 13 

of non-producers if he does not employ an appropriate definition of 
producer. 

(b) It is possible that the labors of various persons might be 
productive now while they would not be productive under socialism; 
for the change in the framework of economic society might make use- 
less certain functions which are now necessary. This undoubtedly 
would not apply to the law profession as a totality, nor to middlemen 
as a whole — that is, there would have to be persons performing lawyer 
functions and there would have to be persons engaged in the selling of 
the products of the comunity to consumers. It is, however, very likely 
that the number of lawyers and middlemen required would be con- 
siderably smaller than under the present order. Bankers would still be 
required, but in considerable less numbers and with much less important 
functions than today. 

Problem 9 

The second clause does not furnish a proof of the first. The fact 
that any particular thing is essential to a certain result does not prove 
that it alone produces that result. The pollen of the flower is essential 
to the maturing of the seed; but it is not the only factor contributing 
to this result. Reasoning analogous to that used in the quotation could 
be used to show that land alone produces wealth, for, without land, no 
amount of effort will result in wealth. It seems almost incredible that 
such an argument should have any weight with intelligent people, but 
such is undoubtedly the fact. We should, consequently, take great pains 
to see that the matter is thoroughly cleared up in the student's mind. 

Problem 10 

(a) The conductor of the street car produces services, (b) He 
produces these services for the street car company, (c) The wealth 
which I buy when I ride in the car is produced by the company. The 
case is strictly analogous to that of the concert. That is, the company 
buys a variety of commodities and services, and assembles these into a 
totality from which I derive the service of transportation. 

Pages 76-77 
Problem 1 

(i) The function of capital in connection with such a dwelling 
would be to "carry" those annual services of the dwelling which belong 
to the future, are from the immediate standpoint idle services. 

(2) The reason why a family expecting to live in Ann Arbor 
only four years would prefer to rent a dwelling rather than buy it may 



14 



PAGES 76-77 



be brought out as follows. First, renting would commit the family only 
to buying four of the total annual services instead of tzventy, and would 
actually involve their buying at any one time no more than one-twelfth 
of an annual service. But, secondly, the opportunity to choose this alter- 
native brings the use of the house -within reach of persons who have 
practically no accumulated wealth, while the alternative of purchasing 
the house— buying the whole twenty services at one time — would be 
absolutely impossible in the case of such a family. 

(3) The last statements have by implication answered the third 
question. Under the ordinary rent contract, the tenant buys each time 
one-twelfth of an annual service of the dwelling. 

Problem 2 

Wright is not, strictly speaking, producing capital, for he is not 
responsible for the existence of the wagon as capital. It is not his 
waiting power that is going into the capital. He is a mere agent of the 
farmer who is about to buy the wagon, and he could not himself afford 
to bring it into existence if he were not to exchange it promptly for 
some form of immediate wealth. WTiile the physical, technical produc- 
tion of the capital good is a vital part of the capitalistic process ; yet, 
under our regime of exchange, the truly distinctive process of capital 
production is the accumulating of the buying power necessary to be the 
purchaser and permanent owner of the wagon. 

Pfoblem 3 

The socialist contention suggests a point which is correct in that 
it suggests the point brought out on pages 68-69, that in a large degree, 
capital is really nothing more than congealed labor and land ( also 
previous capital). The contention is not adequate in that it makes this 
the end of the matter: "producing with the aid of capital ... is merely 
employing our labor and land in a different way." No other condition 
is required ; anyone endowed with the power to labor in the necessary 
way and having control of the necessary amount and kind of land is 
thereby put into a position to employ these in the more efficient way. 
But this is obviously untrue : the power to labor and the power to con- 
trol the needed land do not carry with them the power to employ them 
in the more efficient way ; we must also have the power to wait — - to 
be the owner of reserve 



Problem 4 

Accumulations of money or bank credit do not of course constitute 
the real, final form of capital: this consists chiefly of the tools, machines, 



PAGES 76-77; 79-80 15 

materials, etc., which are used in production. Nevertheless, under 
present-day conditions, these final forms of capital come into existence 
mainly in response to the demands of the persons who have made 
accumulations of money or bank credit, or of the persons who have 
borrowed such accumulations. This could hardly be otherwise for two 
reasons : ( i ) with our extreme specialization, the producer wishing 
Iiarticular forms of concrete capital will seldom be the producer of such 
forms; and (2) the incomes of those who are ultimately responsible 
for bringing capital into existence — and such incomes are, of course, 
the sources from which their capital must come — are, in the great 
majority of cases, incomes of money or bank credit; so that, if these 
persons are to produce capital at all, they must do so in the first instance . 
by accumulating funds of money or bank credit. 

Pages 79-80 
Problem 1 
Without capital, invention could have accomplished little or noth- 
ing; for the application of the new method, in practically all cases, iiv- 
volves the possession of a very considerable amount of capital. That 
is, it is necessary that somebody should have the resources which enable 
him to wait for results, enable him to put thousands of dollars into the 
making of the capital goods, such as steam engines, machines, the rol- 
ling stock for a railway, etc., which are necessary but do not give im- 
mediate returns. It is, therefore, a mistake to think of the inventor as 
the only person responsible for improvement in methods. We must 
have as well men of wealth who have the w^aiting power, the capital. 

Problem 2 

The pursuit of forestry as a private business had to wait till capital 
was relatively abundant — more abundant than was necessary for the 
pursuit of, say, wheat-raising — because of the greater length of time 
which must intervene between the initial processes and their consum- 
mation in a finished product. In the case of wheat-raising, only a few 
months are usually necessary between the beginning of the process of 
wheat-raising and its end. In the case of forestry, the period is vastly 
longer. For the better types of lumber the waiting period is seventy 
or eighty years. Even in the case of the rapid growers, which furnish 
cheaper forms of lumber and various other useful products, fifteen to 
thirty years is necessary. Thus, society must have reached a stage in 
which producers could afford to wait a very long time, if forestry is to 
be pursued as an ordinary industry. 



i6 PAGES 79-80; 87-88 

Problem 3 

This is the same old fallacy which makes labor — manual labor — 
the sole producing factor. In this particular case, the fallacy is 
especially aggravated because the impression is given that the total 
product must be credited to the particular manual laborers ivho happen 
to he ill the strike. Obviously, this mill is using materials, machinery, 
etc., all of which are products of previous labor; so that, if we were 
to admit that manual laborers alone were responsible for this wealth, 
we should have to include a lot of manual laborers besides the particular 
groups that are being employed in the mill at the time in question. But, 
overlooking this error, the obvious fact is that there are other neces- 
sary elements of production here besides manual labor ; that is, we have 
here the directing skill of the manager himself, his accepting the re- 
sponsibility of production, and his furnishing the factor of waiting, etc. 

Problem 4 

There must be managing, there must be selling of goods, there must 
be bookkeeping", and so on. People do not usually intend to include 
these when they talk about working with one's hands. Doubtless the 
majority of well-informed socialist leaders would admit that there are 
other kinds of labor that are truly productive besides those which are 
ordinarily called manual lal)or. But nevertheless it seems quite certain 
that the rank and file, as also not a few leaders and intelligent sympa- 
thizers, are for some reason committed to the notion that manual laborers 
are the sole producers. We cannot exert ourselves too much to get rid 
of this thoroughly fallacious idea. 

Problem 5 

This is too easy to need comment. It is of course well illustrated 
by the case of the fisherman who gets enough dried fish ahead to enable 
him to spend his time making a net. 

Pages 87-88 
Problem 1 

In the case of cooperative production so-called, the entrepreneur 
is constituted by the body of workmen themselves who own the busi- 
ness. The statement quoted is based on the quite untenable analysis, 
still more or less in vogue, which makes the function of the entrepreneur 
to be management. As we have seen over and over again, management 
is a thing which can be hired and hence is a form of labor merely. The 
ofiice or function of the entrepreneur is that which is left after every- 



PAGES 87-88 • 17 

thing which can be hired has been eliminated, and this as we know is 
taking the final rdsponsibility of flic business. 

Problem 2 

(a) The answer is, plainly, no. It is characteristic of any ex- 
changing or cooperating regime that the man should expend his effort 
upon one thing and enjoy some other thing. 

(b) The answer is again, plainly, no. Even if we grant that 
manual laborers only produce, it is still plain that this particular group 
of workers, the masons, hodcarriers, carpenters, and so on, who are 
constructing the palace, are not the only manual laborers who are 
responsible for its existence; for there have been brought over from 
past labor stones, mortar, materials of all sorts which can by no stretch 
of generosity be credited to this particular group of laborers. 

(c) Finally, it is evident, as in the preceding cases, that there are 
other factors in the case besides manual labor which are indispensable 
to the product, especially waiting power and power to assume the 
responsibility of production. 

Problem 3 

The feature of modern industrial organization which makes it 
absurd to represent managing as the special function of the entrepreneur 
is the conducting of business through corporations. Here, obviously, 
the entrepreneur does not manage, or anyhow only in very slight degree, 
since he hires officers who perform this task for him. The real entre- 
preneur is the corporation or the individual shareholders viewed as in- 
corporated. 

Problem 4 

Unless much of our labor were devoted to the doing of things which 
can be rewarded only at a later time, there could be little or no round- 
about production and hence no capitalistic production; for, as we have 
seen again and again, the essential feature of capitalistic production is 
the indirectness of the method, the fact that it makes intermediate goods 
before getting at the making of the final consumption goods. 

Again, it would not be feasible thus to devote a large share of our 
labor to producing for the future, unless the persons doing the work or 
someone for them were so situated that they could spare this labor from 
the producing of goods needed at once — in short, could postpone their 
consumption. But, obviously, under modern conditions, this particular 
function is performed by those persons who accumulate funds of money 
or bank credit, loan these to entrepreneurs, and receive from time to 



i8 PAGES 87-88; 94 

time at later dates a per cent return — that is, these persons are the ones 
who forego the gratifications to which their incomes entitle them, in 
order that we may pursue roundabout methods. But they are, of course, 
the persons who are designated. This, therefore, is the function of 
capitalists. 

Problem 5 
We say the stockholder is an element in the corporate entrepreneur, 
i;ccause he bears final responsibility in the case. The bondholder is not. 
because he does not bear final responsibility — does not assume risks — 
Init is assured the return of his capital and an income therefrom any- 
how. Doul)tless in practice, as in all cases of this sort, the lines can- 
not be drawn as absolutely as we draw them in theory. The bondholder 
almost inevitably does take some risk. But this risk is with most 
corporations reduced to a minimum. Broadly speaking, the risk in- 
volved in jM'oduction is assumed bv the stockholder himself. 

Problem 6 
The two roles of Mr. W were entrepreneur an;l jjromoter. That 
is, the fact that he put some of his own property into the concern made 
him an element in the corporate entrepreneur. C)n the other hand, as 
the person who induced people to start the enterprise — establish the 
business — he is a promoter. 

Page 94 

Problem 1 
Because the company has a large output, there is need for a vast 
number of operations of each special type; and so each man can be 
kept busy doing just one thing. 

Problem 2 

(a) This signifies the practice of devoting one country or section 
of country to the production of some one commodity or class of com- 
modities. It seems to me better to think of it as geographical specializa- 
tion, since the name "geographical division of labor"" implies that this 
has to do with labor only. 

(b) The devoting of western Michigan to fruit-growing, or of 
southern California to the raising of citrus fruits, furnishes a good 
illustration. 

Problem 3 
I used to give for this purpose the practice which carpet or wall 
paper factories have of employing real artists to make designs for them. 
I presume the reader or instructor will think of more recent and better 
illustrations. 



PAGES 94: 100-101 



19 



Problem 4 

Mr. Dowrie suggests as a good illustration of this the automatic 
machine used in the condensed milk factories of Illinois for testing 
packing cans. These, of their own motion, throw out milk cans which 
leak. He also suggests the automatic machinery for sorting apples, as 
respects their size, which is used in Washington and Oregon. 

Problem 5 

This difference between the practice of the country store and that 
of the city store is due to the different extent of their markets. The 
country store cannot afford to devote itself to the selling of one par- 
ticular product, since the demand for one particular product will not 
be large enough to keep the plant and help busy. 

Problem 6 

(a) The great gain from having a world market is the possibility 
of very high specialisation. 

(b) The industrial change which more than any qther thing has 
contributed to the development of a world market is improvement in 
the means of transportation. 

(c) One of the most serious evils of the large-scale market is 
the mal-adjustment between production and demand. It is nuich 
harder for producers to make a reasonable estimate of what amount of 
products they are likely to be able to sell with a large market than when 
their market is relatively small. Another evil flowing from the large- 
market system is the low standard of products. There is greater dif- 
ficulty in inducing producers to maintain a high quality in their prod- 
ucts. The consumer is too far away. The producer often seems able 
to impose almost anything on careless or heedless retail buyers. 

Pages 1 00- 1 01 
Problem 1 

This illustrates the increase in specialization made possible by 
largeness of scale. 

Problem 2 

The fact that the new bank has a paying teller and a receiving 
teller, a discount clerk and a collection clerk, and two kinds of book- 
keepers, illustrates the increased specialization made possible by large- 
ness of scale. The fact that the new bank has eight employees while 
the five old banks had twenty, illustrates the power of the large con- 
cern to economize by utilizing more completely its various factors. 



20 PAGES 100-101: 113-114 

Problem 3 

(a) The stocks of different kinds of goods would not need to be 
as large in the case of the one big store as the sum total of the stocks 
needed in the five small stores. This is due to the fact that the stocks 
are largely of the nature of contingent reserves, reserves held in order 
to meet unexpected calls. But in cases like this, as in all cases where the 
element of chance is involved, the pooling of reserves diminishes the 
amount required, ^l^us, if fifty students go to Chicago to see a foot- 
ball game, each one would feel obliged to carry a little more money 
than he was quite sure to need, in order to be prepared for emergencies. 
But, if the fifty pooled their necessary reserves, the total sum required 
would be much smaller than the sum of all the reserves that would be 
carried individually. For example, if each one needed to carry, say, 
five dollars extra, the whole fifty would not need to carry $250 extra. 
On the contrary, a reserve of $50 would doubtless prove ample. See 
page 96 (2). 

(b) Sinc^, according to the above explanation, the stock would 
be smaller, the building space needed would be smaller ; but this latfer 
is of course fixed capital. 

So, too, the cost of building space needed for showing goods, deal- 
ing with customers, etc., woultl not increase proportionately to the in- 
crease in the number of customers. 

The heating plant needed to take care of one large store would not 
be five times as costly as the smaller one required for each of the five 
dift'erent stores. 

Pages 113-114 
Problem 1 

(a) Under the present order of things, the first stage of capital- 
l)uilding is accumulating a fund of money. But this would be in itself 
worthless, unless it were followed or accompanied by the production of 
goods-«ipital, that is, tools, machines, etc. ; for these are the real 
things which are required to increase the productive power of the com- 
munity. Now, merely increasing the quantity of paper money does not 
in itself promise to increase the quantity of capital of the final form, 
that is, the tools, machines, etc., which are really needed. 

( b ) It might be argued that the increase in the immediate demand 
for lal)or would raise nominal wages, hence would stimulate laborers, 
and so, would finally increase real products, including the various forms 
of goods-capital. Further, this introduction of paper money into the 
system would relieve us from the necessity of replacing all of our 



PAGES 113-114 21 

metallic money stock which should later wear out. This would of 
course save labor power and other resources which we could utilize in 
the creation of true capital. That is, in the long run we might gain 
something in real capital because of having put into the system this 
purely nominal capital, paper money. 

(c) Supposing our community not to have been increased in size, 
it presumably would not need the addition to its money stock brought 
about by the new issue of paper. Accordingly, some portion of the 
metallic currency would tend to be displaced and sent out of the coun- 
try, to be exchanged for the products of other communities. Further, 
these products might easily be cars or rails or machinery, or some other 
kinds of goods-capital. In this way, therefore, the issue of mere paper 
money might after no long time considerably increase the real capital 
of the community. In such a case, the issue of the paper money practi- 
cally amounts to substituting a very inexpensive instrument in place of 
an expensive one already in use which we can dispose of to our neigh- 
bor in return for other useful goods. 

Problem 2 

Instead of employing his surplus in the purchase,- of goods-capital, 
our present-day capitalist could make a practice of using such surplus 
to satisfy new wants, indulge new tastes. In that case, producers would 
be busy making the things which our capitalist wanted for these pur- 
poses, instead of making the goods-capital which are now produced 
and sold to him. It follows, therefore, that if a man would accumulate 
capital he is obliged to go without something which he might otherwise 
enjoy just as truly as was our primitive fisherman. Hence, the creation 
of capital, even under modern conditions, involves saving. 

I hardly need say that the argument quoted does not merit serious 
consideration. Our only excuse for bringing it out at all is its appearance 
in popular socialist literature. To the student it surely must be plain 
that the fact that, under our present order, the capitalist does not have 
to save literal goods, such as the dried fish of our primitive capitalist, 
is a mere accident of our elaborate system of specialization and co- 
operation through money exchange. 

Problem 3 

Surely, yes. The capitalist indicated might have spent his resources 
making things which he could consume immediately, instead of making 
the goods-capital. He therefore saved in the sense of not enjoying 
immediately goods which he might have enjoyed. 



22 PAGES 113-114; 116 

Problem 4 

Yes, this way of building capital would involve saving; for each 
man might have used this extra hour in producing something fitted to 
satisfy his immediate wants. 

Page Ii6 
Problem 1 

It is natural to expect capital to increase more rapidly in England 
than in Scotland because, on account of the higher productive capacity 
of the former, its per capita income is larger than that of Scotland. 

The same is true for Germany as compared with Persia. 

Another reason why capital accumulates in Germany more rapidly 
than in Persia is found in the fact that Germany gives much greater 
security to property than does Persia and so encourages capitalists to 
accumulate. 

Problem 2 

No. It is easy for people of large incomes to accumulate capital, 
while it is very difficult for people of moderate or small incomes to do 
so. What we commonly call the lower middle class in a country like 
the United States seems to show relatively small po\\'er of accumula- 
tion. Accordingly, it seems probable that in an order under which the 
inequality of incomes was greatly reduced and so all incomes became 
moderate incomes, capital would accumulate quite slowly. 

Problem 3 

The postal savings bank encourages saving, especially among those 
who are in a position to set aside only very small amounts. The 
ordinary bank would be loath to open accounts for such persons at 
all. 

Loan and trust companies assure good care for large accumulations. 

Insurance companies encourage accumulation among people of 
middle class incomes — people who would probably save very little on 
any other plan. Early in life such persons decide to take out an in- 
surance policy, and they get in the habit of looking on the payment of 
the premium required as something almost as necessary as the pay- 
ment of grocers' and butchers' bills. Saving of the business man's type 
seems beyond them. They are always living quite up to their in- 
comes. 

Problem 4 

This guaranteeing of bank deposits must surely tend greatly to 
encourage the accumulation of capital. 



PAGES 117-118; 121 23 

Problem 1 

You would naturally expect this condition of things to drive foreign 
capital out of the United States. 

Problem 2 

This case is analogous to that of the stock of tlic one big store 
over against the stocks of the five out of which it was made. Each one 
of the five hundred persons supposed to be depositors in the bank would 
need to have a certain fund of reserve to meet unexpected demands. 
If, now, the five hundred combine to keep their reserves in a common 
reserve, said common reserve does not need to be five hundred times 
as large as the reserve of one of them independently would need to be. 
In fact, one-third or one-quarter of such a sum would doubtless prove 
ample to meet unexpected calls. Here, then, is a great saving in the 
amount of the deposits that must be kept idle. The remainder may 
safely be put to various uses by the banker. 

In addition to the saving above described, another one results when 
depositors in a bank make payments to each other by means of checks. 
In these cases, if it be asumed that there would generally be occasion 
for reciprocal payments, said payments would require no money at all 
but would merely involve the transfer of credit from the account of 
the payer to that of the payee. From these and various other causes, 
banks find it possible to utilize anywhere from 75 to 90 per cent of their 
deposits. 

Problem 3 

Yes. The bonds can be disposed of at a much lower rate of interesi 
than could individual mortgages. For this there are two reasons: 
(i) A bond is much more marketable than a mortgage and hence will 
be taken at a lower rate of interest. (2) The joint guarantee of the 
agricultural loan association gives greater security, and so these bonds 
will be taken at a lower rate. 

Page 121 
Problem 1 

(a) The monopoly assured by patent laws stimulates invention. 

(b) This monopoly also makes capital more ready to try out new 
projects than would otherwise be the case. This second consideration 
particularly needs emphasis, because the general iniblic are too likely 
to think that the only proper purpose of the patent is to stimulate in- 
vention—that the failure of the inventor to get the total reward involves 
much injusice and social disadvantage. The fact is that the social 



24 



PAGES 121: 129; 138: 139 



welfare quite as truly requires the stimulation of capitalists to exploit 
new inventions as it does the stimulation of inventors to work out their 
inventions. 

Problem 2 
Our overliberal policy has at least stimulated the discovery and 
development of the resources alluded to. 

Problem 3 
Rapid transit by electricity was a new scheme of doubtful success. 
Liberal franchises were proliablv nccessarv to insure its being tried out. 

Problem 4 
( I ) The policy indicated would diminish that great al)Solute waste 
of capital on fake enterjirises which characterizes our present policy. 

(2) It would save for business a considerable volume of capital 
Avhich, if not entirely thrown away, is at least changed from the status 
of capital to that of income for a lot of wasteful rogues. 

( 3 ) The new policy would encourage enterprise among those 
prudent investors who, under the present order, are made overcautious 
by the rascality of promoters. 

Page 129 
Problem 1 

28; 14.7; 18.375; M- 

Problem 2 
Twelfth; twelfth; twelfth; sixteenth. You would naturally use 
the one showing the same proportion as the \'s and L's in your pos- 
session. 

Problem 3 
Three times 290, or 870. You use the twelfth combination show- 
ing the same proportion as your stock of N's and L's. Three times 312. 
Three times 330. 

Page 138 
It is true that "the guests are also co6ks," but, if the law of diminish- 
ing returns is operative, the addition to the food supply made by the 
new guests will not be as great as the previous average. In con- 
sequence, each would be better off had there been no new guests. 

Page 139 
The law is two-headed. Because the returns, though increasing, 
are not increasing proportioiiatclx. the price of wheat rises. Because 
the returns, though not increasing proportionally, are, after all, in- 
creasing, the price of wheat does not rise as high as it otherwise would. 



PAGEGS 142; 145; 151; 152-153 25 

(i) Increasing returns; in some combination before the ninth. 
The plant was made for a larger output ; the present small demand 
compels the management to work it in a too early combination. 

(2) In some combination near that of the highest efficiency or 
least cost. Increase in demand makes this possible. 

(3) In some condonation later than that of the highest efficiency. 

Page 145 

Restrictions on innnigration would tend to check the increase in 
population. The check on population, without a corresponding check 
on the increase of capital, would tend to bring about a higher marginal 
productivity of labor. This, in turn, would, under the hypothesis, tend 
to raise wages. 

Page 151 

In the former case, we should be using it in one of the increasing- 
returns combinations, because of small demand. In the latter, we should 
be using it in one of the diminishing-returns combinations Init one earlier 
than the least-cost one — still because of too small demand. 

Pages 152-153 
Problem 1 

If the demand for a manufactured product is extremely small, 
producers in that field cannot get the advantages to be derived from 
large-scale production, and so the cost is high. On the other hand, if 
the demand is extraordinarily great, the industry which supplies the 
raw material needed may be carried so far into the stage of increasing 
cost that the cost of such raw material becomes much the largest part 
of the total cost of the product and hence this increase in the cost of 
raw materials more than offsets any cheapening at other points. Add 
to this that the possibility of further diminishing cost by enlarging the 
scale of production may have been exhausted, and in consequence there 
is no cheapening at other points to be offset. 

Problem 2 

In his opinion, up to 1900 the population was too small to utilize 
effectively the natural plant considered as a whole. Doubtless many 
parts have already been utilized nuich beyond the point of highest 
efficiency; but this may not be true of the totality. If we suppose im- 
provements to go on until the systems of communication between the 
different parts of the country are perfected, and so the power of all the 
different sections to work together is increased to its utmost, and until 
our power to utilize each special feature, e.g., the water transport system 



26 PAGES 152-153; 158-159 

of the Great Lakes, the tropical fruit district of southern California, 
the water powers of the mountainous districts, is carried to the highest 
point, it seems natural to expect that the total output of the country 
would be increased much more than is the labor and capital expended. 

Pages 158-159 
Problem 1 

The different conditions under which copper is mined vary greatly 
in respect to the difficulties and so the costs of production. These dif- 
ferences concern richness of veins, intractability of the ore, the depth 
to which it is necessary to go, the distance from the chief markets, etc 
Again, mining will normally begin with the less difficult, and so cheaper, 
conditions; and will progressively go on to the more costly as the 
demand, and so the price, rises. It follows that an attempt to increase 
output will generally give us the condition of increasing cost. 

Problem 2 

It is quite impossible to believe that the cost of mining copper is 
graded in such a way that every pound or every hundredweight or 
every ton of increase in the output means an increase in cost. When 
the veins capable of being worked at 20 cents per pound are exhausted, 
the next ones perhaps show a cost of 25 cents, so that the marginal cos' 
advances. But it is in the highest degree unlikely that these newly 
opened levels are limited in output to a few pounds or a few tons. In- 
stead, they probably will yield thousands of tons at substantially the 
same marginal cost. But, if so, copper mining is at this stage a con- 
stant-cost industry. 

Problem 3 

(i) Any one car could usually hold some more people. 

(2) Any one locomotive could usually pull a given train even if 
more cars were added. 

(3) The same track would usually be alile to carry not a few 
more trains. 

(4) The terminal facilities could usually supply more service 
without any increase in equipment or working force. 

Doubtless times will come when the most expensive parts of the 
plant have been utilized to their limit and must be replaced on a large- 
scale. In that case the railway will, for the time being, probably have 
reached the stage of increasing cost. P>ut just as soon as the new equip- 
ment has been introduced, said railway will be once more in the stage 
of diminishing cost. 



PAGES 158-159; 166; 168; 173-174 27 

Problem 4 

Increasing cost. The demand for the commodity is so limited 
that the most efficient methods of production cannot be utilized. 

Problem 5 

(a) Constant-cost goods. 

(b) Increasing-cost goods. 

Problem 6 

The expenditures named constitute a relatively small part of the 
cost of farm products — using cost in the broadest sense. In large 
measure, the farmer's prochicts are a return to the services of his land 
and his own labor. 

Page 166 

Since gold is the standard of value, that is, since the meaning of 
the dollar is fixed by a certain quantity of gold, then, of course, the 
value of that quantity of gold measured in American money will al- 
ways l)e one dollar; and the value of any other quantity of gold — say 
one ounce or 480 grains — measured in American money will be as many 
times one dollar as the amount of gold in one dollar is contained in 
one ounce or 480 grains. Since the quantity of gold in a dollar, 25.8 
grains standard fine, is contained in 480 eighteen and sixty one- 
hundredths times, therefore the ounce of gold, standard fine, must be 
worth $18.60, just as long as we continue to maintain the present 
standard. 

Page 168 

(a) $100. 

(b) The money unit would have gone down. 

(c) The money unit would have gone up. 

Pages 173-174 
Problem 1 
Be sure to work out the idea that there must be a double coinci- 
dence both in respect to the kind of goods exchanged and the quantity. 
(3ne coincidence in kind consists in the fact that the other man wants 
the thing you have to dispose of. The other coincidence in kind is that 
at the same time he has for disposal the goods that you want. This is 
a double coincidence in kind. An analogous double coincidence in 
quantity is also required. 

Problem 2 
A favorite illustration of mine has always been the experience of 
a farmer friend with whom I was boarding in the winter of 1878. He 



28 PAGES 173-174 

was arranging to barter cord-wood for a new cutter. What should be 
the ratio of exchange? Naturally, the procedure adopted was to divide 
the money market price of a cutter by the money market price of a cord 
of wood. That is, money was used to measure the value of each; and 
then the proper ratio of exchange liecame a mere matter of division. 

Problem 3 

(a) Primitive communities are too poor to use much money in the 
strict sense, i.e., a something specially set apart to perform money func- 
tions. Such a community, therefore, employs as a medium of exchange 
goods which will be needed for other purposes if they are not being 
used as a medium of exchange. For a similar reason, such a com- 
munity em]:)loys goods which are sure to be had in abundance among 
them, that is, goods which they themselves produce, e.g , tobacco in 
Virginia in colonial times. 

(b) Another reason for employing as a medium of exchange 
goods which are desired for direct use is this : Until confidence in the 
stability of custom or legal arrangements had reached a high develop- 
ment, men would hesitate to risk very much of their wealth in a form 
which depended for its continued value on custom or legal arrange- 
ments. That is, paper money or any other merely representative money 
would be received only for amounts too trifling to involve the risk of 
any considerable loss. For all larger sums, men would insist on receiv- 
ing something which carried its security in itself, i.e., something the 
value of which could be realized in utility if necessary. 

Problem 4 

Congress got around to this opinion at about this time, because the 
discovery of gold in California and Australia greatly lowered the value 
of gold, or raised the value of silver as measured in gold, and as a con- 
sequence, gold became the standard of value while silver went to a 
premium, a fact which was quickly followed by the withdrawal of the ' 
smaller silver coins from circulation. To remedy the inconvenience 
thus resulting. Congress provided for putting the fractional silver into 
the position of subsidiary coin, i.e., they reduced the amount of silver 
in the dollar from 4i2io grains to 384 grains. 

Problem 5 

During the years named there was much agitation in favor of the 
free coinage of silver which would, of course, have meant a silver 
standard having little more than half as much value as the existing 
gold standard. Creditors, naturally, tried to guard against the pos- 
sibility of being paid back according to this lower standard. 



PAGES 173-174; 184-186 29 

Problem 6 

This means that the vakie of the peso, the PhiHppine unit, rises or 
falls with the value of 12.9 grains of gold .9 fine. 

Problem 7 

The precise issue of this controversy was as to whether the mone- 
tary standard should be the value of 25.8 grains of gold, or the value 
of a greenback dollar ; in other words, whether the value of one dollar 
should be determined by the value of 25.8 grains of gold or by the value 
of a greenback dollar. The creditors of the United States were perfectly 
willing to be paid in greenbacks, provided they received for each dollar 
a value equal to the value of 25.8 grains of gold, multiplied by as many 
times as the number of dollars in the debt due them. 

Pages 184-186 
Problem 1 
This check was drawn in Ann Arbor, mailed to the Newcomb- 
Endicott Company of Detroit, indorsed by them, and deposited for 
credit with the Peninsular Savings Bank of Detroit. It was then in- 
dorsed by said bank payable to the State Savings Bank of Ann Arbor, 
mailed to said State Savings Bank of Ann Arbor, by them presented 
at the Clearing House in the Ann Arbor, settled by the National Bank 
of Ann Arbor, on which it was drawn, stamped as paid by the State 
Savings Bank, thus leaving it in the hands of the National Bank of Ann 
Arbor until settlement with you. 

Problem 2 

(a) See form D or I in McMaster's "Law of Commercial Paper." 
The payee should be T. C. Craig's bank, say, the First National Bank 
of Detroit; the drawee should be H. T. Crouch in the left bottom 
corner ; the drawer should be T. C. Craig. 

( b ) This is the ordinary check. Payee, T. C. Craig ; drawee, 
H. T. Crouch's bank; drawer, H. T. Crouch. 

(c) Ordinary bank draft. Payee, Craig; drawee, the New York 
bank which is the correspondent of Crouch's bank ; drawer. Crouch's 
bank at Erie. 

Problem 3 
(a) If the transaction named were settled by a sight bill of ex- 
change, its course would probably be as follows: T. C. Craig of Detroit 
would deposit it for credit with the First National Bank of Detroit. 
The First National would mail it to their correspondent in New York, 
and credit themselves with the proceeds. Their correspondent in New 



30 



PAGES 184-186 



York would mail said bill to their correspondent in Erie ; or if they 
had none, to their correspondent in Buffalo or Pittsburgh, or some other 
neighboring place. In the latter case, said Buffalo or Pittsburgh cor- 
respondent would, in turn, mail the bill for credit to his Erie corre- 
spondent. Once the l)ill has reached an Erie bank, it would then be 
presented to Henry T. Crouch for collection. It is always possible, 
when enough bills of this sort are drawn by a particular house upon 
some other house, that the bank with which the drawer deposits should 
establish direct relations with some bank in the town of the drawee — 
in this case Erie. If such conditions are fulfilled, the journey of the 
bill will obviously be much shorter. 

(b) If the transaction named were settled by a check, the starting 
point would be in Erie with Mr. Crouch, who would draw the check on 
his bank in Erie, mail said check to T. C. Craig of Detroit, who, in 
turn, would deposit it with his bank in Detroit, say the First National, 
after which the check would take a journey similar to that supposed 
for the bill of exchange, except that, after reaching Erie, it would be 
collected, not from Mr. Crouch, but from the bank on which it was 
drawn through the Clearing House. This only needs to be added : that 
the course of a check is often more roundabout than that of a bill of 
exchange. Not having any security with it in the shape of a bill of 
lading, and manifestly being private in character, there is considerable 
likelihood of some exchange being collected in the course of its settle- 
ment. Each bank receiving it, therefore, attempts to avoid paying for 
collection by sending this check to some correspondent : and in the 
effort to deal only with a correspondent, it may prove necessary to 
avoid the natural and direct line to the place on which the check is 
drawn. 

(c) If our transaction were settled by a bank draft, its course 
would probably be as follows : Said draft would be purchased by Mr. 
Crouch of his Erie bank wdiich draws it on the New York correspond- 
ent of said Erie Bank. It would then be mailed like the check to T. C. 
Craig of Detroit; then deposited by Mr. Craig with the First National 
of Detroit ; then sent to their New York correspondent for collection 
from the drawee, that is, the New York correspondent of Mr. Crouch's 
bank in Erie. Thus the bank draft would probably take the shortest 
journey of these three sorts of paper. 

Problem 4 
Our trade with Great Britain easily develops a medium of exchange 
for our trade with Brazil in this way: when we sell cotton or wheat 



PAGGES 184-186 31 

or meat to Great Britain we draw a l)ill of exchange against such sale 
upon the consignee in Great Britain; such l)ills we turn over to Brazilian 
exporters from whom New York purchases coffee or sugar, and they 
are accepted as adequate payment for said coffee or sugar, since Brazil 
buys a large amount of manufactured products from Great Britain, 
and hence has need for credit upon bankers in Great Britain. 

Problem 5 

No. I Debit $5,663.87 

No. 2 Credit 4,164.97 

No. 3 Credit 1,774.84 

No. 4 Credit 3,745.64 

No. 5 Debit 4,021.58 

Problem 6 

(a) The total volume of the transaction involved must have been 
the sum of all the claims against the five banks. The mistake to be 
guarded against here is counting these sums twice over. In order to 
compute the balance against each bank it is necessary to construct five 
tables, analogous to those given in the book, but showing the debits of 
each bank instead of its credits. The student might then slip into saying 
that number one has credits to the amount of $7,006.45 and debits of 
$12,670.32, or a sum total of $19,676.77, and so with the rest; and that, 
consequently, the total volume of business is the sum of all these ten 
items, or $76,700.44. In fact, of course, these have all been counted 
once when we have computed either the debits of a bank or its credits; 
and so we must not count both. ( The actual sum of all the claims is 
$38,350.22.) 

(b) The amount of actual cash needed is the sum of the debit 
balances or the sum of the credit balances, that is, $9,685.45. This sum 
the debtor banks bring in at, say, twelve o'clock, and ten minutes later 
it is paid over by the Clearing House manager to the three credit banks ; 
and hence the whole sum is needed to effect transactions which involve 
payments amounting in all to $38,350.22. 

(c) The per cent of the total volume is obtained by dividing the 
$9,685.45 by the total volume of transactions — $38,350.22 — which gives 
us about 25 per cent. 

(d) The significance of these facts is that under a credit system 
such as ours a vast volume of traasactions can be carried on with a 
very small quantity of actual money. 



2^2 PAGES 184-186 

Problem 7 

The English business world makes much greater use of credit 
media of exchange than does the French business world. In con- 
sequence, the former has need of much less money to transact a given 
volume of business than has the French business world. 

Problem 8 

Barter means really direct exchange of commodity A against com- 
modity B. Mediated exchange is exchanging commodity A for an 
intermediate good — a middle term — and using this intermediate good 
to get in exchange commodity B. Obviously, we continue to do this, 
even when the intermediate good is the right to money instead of money 
itself. In fact, we are still using money, but using it in such a way 
that a large saving in the amount needed is effected. A good way to 
clear this up to your own mind is to show yourself that there could be 
a system of credit barter exchange with cancellation just as there now 
is a system of credit money exchange. 

Problem 9 

If I wish to buy a bank draft for £200 on London when London 
exchange is $4,855, I ought to be able to get it for 200 times $4,855, 
that is, $971. 

Problem 10 

Our wheat exporter ought to get for his London bill 1375 times 
$4.87. in the first case, that is, $6,696.25 ; and in the second case, 1375 
times $4.84, that is, $6,655. 

Problem 11 

Under the first hypothesis, the importer's profit would be : 

50 X 12 X 12 X 44 X 4.84 

50 X 12 X 12 X .95 ; that is, $451.20, 

12 X 20 

Under the second hypothesis, the importer's profit would be : 

50 X 12 X 12 X 44 X 4.87 

50 X 12 X 12 X .95 ; that is, $411.60, 

12 X 20 

Problem 12 

The next to the last problem shows that an exporter naturally 
makes more profit on a transaction when exchange is high ; and, in 
consequence, high exchange tends to stimulate exports. 



PAGES 184-186; 193-195 33 

The last problem shows that an importer naturally makes higher 
profits when exchange is low; and, consequently, a low rate of ex- 
change tends to stimulate imports. 

Problem 13 

By deposit currency we mean the bank credit created by deposits, 
which is widely used as a medium of exchange instead of literal money. 
Among writers this particular phrase is most affected by those who are 
inclined to look upon bank credit, not as a method of using money 
economically, but rather as a medium of exchange different from money. 

Problem 14 

In the fall of the year you would expect to find the exchange on 
Europe near the lower gold point ; that is, $4,835. The reason for this 
is that in the fall of the year we are selling to Europe much more than 
we are buying from Europe. In consequence, the volume of credit on 
Europe is very large ; and hence its price, as measured in the rate of 
exchange, is lower. 

Problem 15 

In America, when a man makes a loan at a bank, he does not as a 
rule take out the proceeds of his loan in the form of money. On the 
contrary, he deposits those proceeds to his credit and continues to draw 
checks against that deposit just as if he had deposited money. Since 
the practice of carrying on business with money borrowed from the 
banks is very extensively employed in America, the volume of deposits 
arising by this process is very great. 

Pages 193-195 
Problem 1 

(a) The principal thing to be gained by maintaining trade rela- 
tions with the outside world is that cooperation with other nations which 
enables us to specialize in those industries where we show greatest 
efficiency, and thus increase the quantity and quality of the goods which 
we in the end enjoy. 

(b) It would be to our advantage to have our foreign trade bring 
in a money balance, provided special circumstances, say a panic, had 
made us particularly short in money — or provided we were not pro- 
ducers of gold and for some reason or other wanted to add to our stock. 

Problem 2 
A nation, which sends out a dollar in exchange for foreign goods 
worth a dollar, is neither richer nor poorer as a direct result of the 
transaction. Looking mere deeply, however, it is really richer; for 



34 



PAGES 193-195 



this exchange is merely the consummation of a system of speciahzation 
and cooperation which makes the nation far more efficient economically, 
and so, far richer than it would otherwise be. 

The case of the individual is not materially clitTerent. If we are 
not cheated, spending a dollar makes no immediate change in our 
economic status. Doubtless, however, the word "spending" is here used 
in a sense which gives some point to the contention that by spending 
the individual makes himself poorer. That is, the word is often used 
to mean b living things zvliich must be coiisinncd soon, or anyhow will 
rapidly deteriorate in value, whereas the money paid out would have 
kept its full value for an indefinite period; so that the act of spending 
in this sense tends in the end to lower our economic status. 

Problem 3 

This cannot result iuuncdiatcly. since immediately we make our 
purchases not with money but with some instrument of credit. On the 
other hand, it cannot result ultimately, since, in the long run we must 
pay for goods bought with goods produced and sold; that is, we must 
make a great many sales as v/ell as a great many purchases. The credits 
thus created we set over against our debits and pay or receive in payment 
only the balance. As a matter of fact, we send out only a very small 
fraction of the cost of our purchases in actual money. 

Problem 4 

The facts indicated would show that a very large proportion of the 
business transactions of the community during that day were effected 
with credit media of exchange instead of with money; for the materials 
received by the l^anks as deposits in the course of a particular day show 
in a very large measure what instruments of exchange have been em- 
ployed in the business world during that day. This grows out of the 
fact that most business houses are patrons of banks and near the close 
of the day deposit with their l)ankers almost all the money or money 
sul)Stitutes which they have received in the course of the day's trans- 
actions. If, therefore, the deposits of banks are chiefly checks, the busi- 
ness of the day has been mostly conducted with checks. Doubtless some 
busines transactions have taken place during the day which did not 
result in deposits with the banks ; but the proportion of these is surely 
small and would not materially alter the general result. 

Problem 5 

Whether or not a govermnent loan wastes capital turns entirely on 
what disposition the government makes of the proceeds. Such a loan 



PAGES 193-195 



35 



puts at the government's disposal a certain amount of resources. If 
these resources are used to satisfy immediate needs, whereas the capital, 
if left with private persons, would have been used productively, then 
capital is wasted. If, however, the government uses said capital to 
construct a Panama Canal, it is really consummating the process where- 
by capital is created, just as much as the use of it by private persons 
would be doing this. The fact that the literal money borrowed remains 
in existence would have no bearing upon the case. This would be true 
anyhow. Money is a bit of social machinery of a highly durable 
character which lasts almost indefinitely, needing only small additions 
to keep it intact, like such permanent forms of capital as roads, canals, 
etc. As far as capital production is concerned, money is merely a form 
in which such capital momentarily appears when it is first brought into 
existence. There is no complete creation of capital, no consummating 
of the process of producing capital, unless we go on to the construction 
of products used for productive ends. If we fail to do this, using re- 
sources destined for such ends to fight useless wars or support worth- 
less favorites, we waste capital, though, of course, the total stock of 
money is not altered in the least. 

Problem 6 
(a) It is quite certain that we did not permanently lose no million 
dollars in gold because we hired foreigners to carry our goods. The 
obligations which we incur by hiring foreigners to carry our goods, 
like other business obligations, are immediately settled with checks and 
drafts. They therefore simply pass into the great volume of indebted- 
ness which we have toward other countries and are liquidated just like 
other forms of such indebtedness by being set over against claims or 
credits which we have on other countries. Now, in the long run, there 
is but one way of creating these credits against other countries, viz., 
by selling those countries goods or services which we can advanta- 
geously produce in excess of our own needs. We can no more afford 
to use our money circulation for the purpose than we could afford to 
burn our furniture to keep the house warm. Later the student will 
learn that, if we were to try to do so, our purpose would be defeated 
by the automatic working of the market. Here a few facts will suffice. 
In the year Mr. Blaine made the speech from which our quotation came, 
we imported 97 millions more gold than we exported. For the twenty- 
three years from 1879 on, in spite of the fact that we were among the 
chief producers of gold and so would naturally have some surplus to 
sell, the net movement of gold was an import of Q^ miUions. 



36 PAGES 193-195 

(b) It is quite certain that we did not part with any such quantity 
of gold even temporarily. As already said, we pay for such services 
with checks or drafts just as we pay for any other foreign products. 

(c) It is not likely that we should have been richer, had we done 
this carrying of products ourselves. Doubtless the reason why our 
capitalists do not direct their productive resources into this channel — 
the carrying trade — is that they find themselves able to get greater profits 
in other channels. But presumably they are able to get these greater 
profits in other channels because in these other channels their resources 
are more productive, more efficient. If. in spite of the natural tendency 
of things, we had quit producing the other goods and turned our atten- 
tion to the carrying trade, we should without doubt have produced a 
smaller total of wealth than by doing what we actually did do. Of 
course it may be desirable on other grounds to make the sacrifices neces- 
sary to develop a merchant marine. 

Problem 7 
Without any regard to the wisdom or unwisdom of spending the 
thousand dollars on the fireworks exhibition, this reasoning is quite 
fallacious in respect to the final results in the case. The best way to 
make this clear is to strike the balance of ingoing and outcoming for 
each of the two parties concerned. The man who bought the fireworks 
parted with $i,ooo. There is a minus item. He received in return 
$1,000 worth of fireworks. Here we have a plus item. Finally he fires 
off the fireworks disposing thus of the $i,ooo. Here we have a second 
minus item, making two minus items of $i,ooo and one plus item of 
$1,000. The net result in wealth in possession is obviously a minus 
$1,000. On the other hand, the man who sold the fireworks received 
$i,ooo in money, in return for which he gave $i,ooo worth of fireworks. 
Here we have a plus item of $i,ooo and a minus item of $i,ooo, leaving 
a net result of zero gained or lost. Thus the transaction on one side 
results in a net loss of $i,ooo and on the other side leaves no loss or 
gain. The total, then, is a loss of $i,ooo. Of course this does not mean 
that the transaction was of no advantage. The buyer of the fireworks 
was $1,000 poorer and no one else was a $i,ooo richer. But the buyer 
obtained the gratification of wants, derived from the firing ofif of the 
fireworks. 

Problem 8 
The fallacy here is essentially the same as in Problem 7. The 
people who paid the taxes parted with, say, 20 millions of dollars, for 
which, as far as the data of the problem go, they received no equivalent. 



PAGES 193-195 37 

There is thus on this side a clear loss of 20 millions of dollars. When 
Frederick paid out this 20 millions, the receivers of course gained 20 
millions, but this was offset by the 20 million dollars worth of products 
which they had to give to Frederick to get the 20 millions in money. 
On this side, therefore, there was neither gain nor loss. There was 
therefore a total loss of 20 millions to the taxpayers as such. The real 
justification for the wars, and so for the expenditure thereby incurred, 
like the justification of any other expenditure, is to be found in the 
results of that expenditure, that is, what that expenditure purchases. 
If Frederick's wars accomplished results for Prussia which were worth 
ihe price, then said expenditure was perfectly justified. As a matter of, 
fact, it can hardly be doubted that the results were, on the whole, of 
vastly greater value than their cost in money, and so the expenditure 
in question was fully justified ; but no justification can come from the 
sort of argument which Frederick himself employed. 

Problem 9 

Answer : "Made an increased demand for the goods and services 
of the people of our village." 

Problem 10 

It is not true even for the individual that he can get rich only by 
selling more than he buys and saving the surplus in the form of money 
or bank credit. Doubtless this is one way to get rich, a way which was 
much followed in earlier times ; but, nowadays, a man gets rich by 
buying with his money the right kind of thing, that is, by buying some- 
thing which is productive, which will in the future yield him a return. 
Further, in the case of a country, treated as a whole, there is almost 
nothing in the idea that the way to get rich is to accumulate money. 
As has been so often pointed out, the real significance to a nation of 
its foreign trade is that it permits more extensive cooperation and 
specialization. This plainly has no more direct bearing on its accumu- 
lated wealth than any other method of attaining high efficiency. The 
truly best method of increasing accumulated wealth for a nation, even 
more than for an individual, is the one pointed out above, i.e., increas- 
ing its stock or outfit of durable means of production, its roads, canals, 
factories, etc., etc. ; and of course this should be done in the proper 
proportion, including a suitable amount of money. 

Problem 11 

If we admit that the ii:dividual man will take all the money offered 
him in exchange for his goods or services, this is only with the proviso 



38 PAGES 193-195; 203-205 

that said individual is permitted to make the natural use of that money, 
i.e., to exchange it for food, clothes, or anytliing else which he may 
de'sire. If it were made a part of the bargain that he must keep said 
money stored without expending it for other things, it is not true that 
he would gladly accept all otTered. On the contrary, he would probably 
refuse any offered on this condition, since it would involve his estab- 
lishing a storehouse, keeping guard over the money, etc., etc., — and all 
this to no purpose whatever. The case of the community is no dif- 
ferent. If a country can utilize the money that comes to it by buying 
with that money other goods, said country ought to take any amount 
offered and ought to be glad to do so. But this is contrary to the 
proviso in the case before us. That proviso is that the country shall 
keep within its own boundaries all the money that comes into it, not 
using any of it to buy goods from outside. Now this amounts to claim- 
ing that the country can advantageously utilize as money, as a part of 
its machinery of exchange, all the money that could be brought into it. 
But this is surely absurd. A country could no more utilize to advantage 
all the money which might come in than a family could utilize advan- 
tageously all the cook-stoves it might buy. A country can utilize to 
advantage all the money needed to do its money work, but no more. 
To keep more than enough is like buying a lot of extra cook-stoves. 
If money in excess of this comes in, sensible people would desire to 
utilize it by sending it out again to purchase things more needed. 

Problem 12 

This is, of course, the same fallacious idea that we have had over 
and over again in the problems. The fact that Americans are spend- 
ing $200,000,000 abroad does not mean that this much money is sent 
out either immediately or ultimately. The foreign traveler does not 
carry in his pocket the money he needs. Instead, he takes with him a 
letter of credit or some other credit instrument, which he utilizes to get 
cash as he may need it. Thus, his traveling abroad does not, in the 
first instance, affect in the slightest degree the quantity of money circu- 
lating in this country. But, further, his travel makes no difference in 
the long run, since the indebtedness against us created by his travel 
goes into the general stock of such indebtednes and is canceled by ex- 
ports like any other part. 

Pages 203-205 
Problem 1 

George Rankin's demand for the goods and services of other 
people, that is, his capacity in a general way to add to the total of em- 



PAGES 203-205 



39 



ployed persons, is fixed by this total income, not l)y his choosing to spend 
$400 in this way. If he did not spend this money on building the dam, 
he would of course spend it in some other way. Even if he deposited 
it in the bank and did not spend it himself, it would undoubtedly be lent 
to someone who would spend it and would thereby create a demand 
for labor. 

Problem 2 

The notion that the amount of work to be done at any particular 
time is fixed, though very common, is none the less erroneous. The 
amount of work demanded depends on the amount of product offered 
in exchange for labor. Since the work of women and children would 
increase the amount of product, it would correspondingly increase the 
demand for labor to produce the things which the women and children 
wanted, and, because of their own production, were able to buy. 

Problem 3 

It is quite certain that those who have the money have unsatisfied 
wants, else they would not be taking the trou]:)le to get the income. 
Their unsatisfied wants may be for capital goods, such as buildings, 
engines, machinery, etc., but they are unsatisfied wants just the same, 
and constitute a demand for products, and so, for the labor to produce 
products. If production were directed properly it would have no 
trouble finding a market, since it would be employed in supplying the 
things which the people in possession of the money really want, instead 
of supplying things which only those who are too poor to buy want. 

Problem 4 

(a) In deciding to spend and actually spending $600 to redecorate 
her house Miss Cynthia would not increase the employment of laborers 
generally, for she is bound to spend her income in hiring men to do 
something or other, and in so doing would cause employment. 

(b) We can be certain that everybody is now doing the very thing 
which Mr. Blossom thinks they ought to be doing; for they are taking 
the trou])le to earn an income, and we can be quite sure that they would 
not be doing this unless they had some use for that income in buying 
from somebody goods or services which they could not produce for 
themselves. 

Problem 5 
Yes, the cold snap was a bonanza for Ann Arbor plumbers. The 
student is in danger of confusing this statement with one which declares 
the freeze-up to be a bonanza for producers generally, a statement 
which would of course be untrue. 



40 PAGES 203-205; 215-219 

Problem 6 

There is no difference between these two cases. The man that 
saves $10,000 and buys gold with it to bury in the ground creates just 
as great a demand for products as the one who spends a similar sum 
for a banquet ; for the gold which he buys and buries in the ground 
has to be produced just as truly as the banquet itself. 

Problem 7 

Plainly not. The volume of demand is fixed by the volume of 
product. The fire made greatly increased demand for some products, 
but not for more products in general. 

Problem 8 

There are various reasons why it is to the interest of every kind 
of producer to see the efiiciency of other kinds of producers increased; 
but the one which is called for at the close of this particular chapter 
is that the increased efficiency of other people increases their demand 
for my goods. 

Problem 9 

Same old case of misdirected production. Demand and supply are 
each coincident with product; if product is what it should be, the two 
cannot help being equal. 

Problem 10 

If King Haakon took to blacking his own boots his demand for the 
services of other people in some field would be just as much increased 
as his demand in this particular field is lessened, for of course his total 
demand is unchanged until his income changes, and there is no such 
change in the hypothesis. 

Pages 215-219 
Problem 1 
The author doubtless meant that keeping our fleet in our own ports 
Vx ould increase the demand for the goods produced by our people and so 
would increase the amount of employment. This overlooks the principle 
of reciprocity. If our fleets are using goods of foreign nations, America 
must produce goods of some sort to pay for these, for we may be quite 
sure that the foreigner will not make us a present of his goods. But the 
foreigner's demand for the goods which we use to pay for our supplies 
would increase the demand for American goods just as much as would 
the location of the fleet in our own port. In short, a change in our policy 
would not tend to increase or decrease business or employment in general, 
but only to shift it from some fields to others. 



PAGES 215-219 41 

Problem 2 

If we do not buy al)road, we cannot sell abroad. Exports and im- 
ports must be equal. If, for the sake of those home producers who are 
producing at a disadvantage in this country, we put import duties on 
certain goods, and so exclude those goods from our markets, we thereby 
reduce the sales of foreigners to this country, and hence reduce their 
power to purchase from us. But obviously this loss falls on those home 
producers who supply the major part of exported goods. Further, these 
producers are naturally and inevitably those home producers who are 
engaged in industries for which our country is well adapted and which, 
therefore, are not protected by tariff. In so far, then, as protection suc- 
ceeds, it wrests the foreign market "from unprotected home producers." 
( There was a good deal of point in the southern contention that, under 
actual conditions, the protectionist legislation of 1828 and 1832 was 
sectional legislation.) 

Problem 3 

The things bought from Boston by Marblehead could not be paid 
for with money, because money was not a Marblehead product. Marble- 
b.ead must have done its paying with fish or something which it did 
produce. — 

Problem 4 

This is, of course, very silly and would hardly be indulged in even 
by the average American newspaper. It is, however, the exact analogue 
of the sort of thing that is frequently said with respect to Chinese labor. 
It is the usual mercantile fallacy that only those people who buy from 
us contribute to our industries and merit reward. Obviously, the people 
denounced in the supposititious quotation have been, in part, at least, 
responsible for the existence of the wealth produced by the Benton Har- 
bor district, and therefore have, in the truest sense, contributed to the 
support of Benton Harbor industries. Further, their contribution is 
doubtless quite as large as the income which they have received in re- 
turn. What use they make of that income is the business of no one but 
themselves. Still, again, probably it would not be of any immediate 
advantage to Benton Harbor to sell its goods to these particular persons. 
On the contrary, the producers of such districts soon learn that the best 
customers — the customers who can pay the best prices — are a good way 
away from home. (Local consumers always find it extremely difficult 
to get good products of the sort for which their district is famous.) The 
l)est markets for the choice peaches, grapes, etc., are to be found among 
the wealthy classes in the great cities and their suburbs. 



42 



PAGES 215-219 



Problem 5 

(i) Exports and imports must, in tlie long run, be equal. If, then, 
opening up new markets increases our exports, it must lead to a corre- 
sponding increase of imports. 

(2) Nations which do not produce gold must get it by importation. 
But, as gold usually comes in the form of money, it is not counted in the 
reported imports, and so such a country would, if other conditions did 
not neutralize this one, seem always to have an excess of exports. We, 
however, are one of the chief producers of gold, would therefore natu- 
rally export gold, and hence would not have at this point a cause tending 
to interfere with the prompt working of the principle of reciprocity. 

Problem 6 

Same as that in Problem i above; if we buy coal supplies abroad, 
our labor and capital will have employment producing the goods which 
we export to pay for said supplies. 

Problem 7 

The fact that the things which we sell to our neighbors are more 
necessary to them than the things which they sell to us are necessary to 
us is a reason why the ratio of exchange between them and us should be 
"more favorable to us ; that is, it is a reason why the advantage derived 
from exchange should be so divided as to give us a larger proportion 
than they get. It is not, however, a reason why our exports should be in 
excess of our imports. If the intense needs or demands of our neighbors 
cause a great increase in our exports, this increase in our exports must 
in turn cause a corresponding increase in our imports. 

Problem 8 

Unless foreigners in general could sell to Great Britain they could 
not buy goods from Great Britain, because they would not have the 
wherewithal to pay for the goods purchased. Consequently, if Great 
Britain opens her ports to other people she thereby creates for them a 
buying power wherewith they can purchase goods from her. Further, 
it should be noticed that this selling to Great Britain itself brings about 
a stimulus to buying from Great Britain; for it makes credit on Great 
Britain abundant in foreign countries, lowers the rate of exchange on 
Great Britain, and therefore stimulates purchases therefrom. 

Problem 9 

(a) No. We pay for goods with goods — for rails with cotton. 

(b) If we produced the rails at home we should have to take labor 
and capital from some of the existing industries, say, cotton, in order 



PAGES 215-219 43 

to produce the rails. We should not then have both the rails and the 
cotton, but only the rails. 

Problem 10 

This might be a reason why trade between the United States and 
other countries would be large, but it could not be a reason why the 
excess of exports over imports should be great. If the cause named 
brought an increase in exports, that increase in exports would in turn 
bring about an increase in imports. 

Problem 11 

(a) The real economic evil of having our neighbors shut out our 
goods is that it takes away the opportunity for cooperation and special- 
ization. 

(1)) We surely would not better matters by shutting out their 
goods. Of course, if they had entirely shut out our goods, our action 
in shutting out theirs would make no dilTerence, since, if we could not 
sell them anything, we should be equally unable to buy from them any- 
thing. But no such complete stoppage of trade is contemplated. For- 
eigners destroy a part of our trade by putting duties on certain goods 
that we have to sell. This diminishes considerably our buying power 
from them, and hence diminishes the extent of cooperation and speciali- 
zation. If, now, we proceed to shut out some goods of theirs, we, in 
turn, diminish their buying power as respects ourselves, and thus still 
further reduce our trade, and so, the extent of our specialization and 
cooperation. In other words, "fair trade," as it is commonly called, is 
just as fallacious, doctrinally speaking, as is protection. 

Problem 12 

(a) No; unless he has cheated them: for in order to get an in- 
come from the people of Detroit, he has been obliged to give them an 
equivalent in services. There is therefore no balance of obligations on 
either side. 

(b) No; if the son buys goods in Ann Arbor, Detroit is thereby 
put under obligation to the city of Ann Arbor, that is, becomes the 
debtor of the city of Ann Arbor. This debt must be made good by 
selling Detroit products either to Ann Arbor itself or to some other 
community which does sell to Ann Arbor. The demand for Detroit goods 
will in the end be just as great whether the student buys his supplies in 
Detroit or Ann Arbor. On the former plan, the demand will be for 
students' supplies: on the other, it will be a demand for the exported 
goods which in the end pay for the goods bought by the student in 
Ann Arbor. 



44 PAGES 215-219 

Problem 13 

(a) This is substantially the same case as the last. If the com- 
munity in question buys certain goods from Chicago, it will be obliged 
to sell and so, to produce, other goods in order to pay for those goods 
which are purchased in Chicago. 

(b) In this particular case there is another and extremely silly 
fallacy. Ihe buying power of the butcher with respect to the grocer, 
that of the grocer with respect to the dry goods merchant, that of the 
merchant with respect to the doctor, and so on, would be increased, 
not by one dollar, but only by the {profits of the sale. Thus, the butcher 
who receives a dollar for a piece of steak will not, because of this sale, 
have a dollar which he can use to buy a dollar's worth of groceries ; 
for the major part of this money he must use to pay the stock raiser 
or the packer for the beef. If we suppose his rate of profit to be 12 
per cent he would derive from the sale in question just 12 cents in 
purchasing power. That is, he can buy only 12 cents" worth of goods 
from the grocer. But the grocer, having received this 12 cents, can- 
not spend it all for dry goods, since he has to pay for the goods he has 
sold. Supposing his rate of profit (including pay for his own services) 
to be 20 per cent, he will now have 2.4 cents with which to make pur- 
chases at the dry goods store. Out of this 2.4 cents, the dry goods 
merchant would clear perhaps 3/10 of a cent, which he could spend on 
the doctor. Plainly, the amount of the original dollar which would be 
left by the time the butcher came around to get his tooth mended would 
be practically infinitesimal. 

Problem 14 
The effect of this condition is to swell England's imports. Of 
course, she is exi)orting something to offset this excess of imports; but 
then, this something is the use of capital, an export which does not show 
in the returns of the customs house. She receives her pay, however, 
from a larger volume of wheat, meat, cheese, butter, etc. ; and these, 
being all items which appear in the customs house reports, her imports 
will show a very decided excess. 

Problem 15 

(a) He probably thinks that the possession of the large fund of 
money would enable people in the conuuunity to hire labor, start fac- 
tories, etc., and so, increase the general productive power, ctcii though 
that money could not he sent out. 

(b) His expectations are quite unreasonable. Money will help 
us to start up industries because, and provided, we are allowed to use 



PAGES 215-219 



45 



it buying the real things needed — labor, raw materials, machines, 
engines, etc. Further, in the case of labor, it is not really the dollar 
which buys that labor, but the food, clothing, etc., for which the laborer 
expects to exchange the money. Accordingly, the very reason for want- 
ing the money is the use we can make of it outside to buy food, tools, 
machinery, etc. 

(c) The policy in question would make the county poorer rather 
than richer ; for it would use up the productive capacities of the county 
in accumulating great quantities of something which its people had no 
use for, whereas these same productive capacities might have been 
employed in increasing the various forms of needed capital, and so, 
increasing the productive power of the county. 

Problem 16 

Undoubtedly the productive capacity of a county would be in- 
creased if a man were to move in bringing with him $100,000 in money, 
provided he zvcre permitted to send that money out of the county to get 
back in exchange food, clothing, machinery, engines, etc. There is 
therefore no inconsistency between our two propositions. 

Problem 17 

(a) The writer probably thought that the extravagance of Mrs. 
Gould leads to a larger demand for goods, hence more business, hence 
more employment for labor and capital. 

(b) This is the same old fallacy. Mrs. Gould's income will of 
course be spent in some way. In whatever way it is spent, it will make 
a corresponding demand for goods, a corresponding volume of business, 
and a corresponding demand for labor and capital. Perhaps it is all 
right for her to spend the money this way; but, if so, this is because 
the goods and services bought with the money give an adequate return. 
The reason given by the editorial quoted has no force whatever. I 
hardly need say that the philanthropist and the economist would say 
that she could make a use of the money which would be far better from 
the standpoint of the public generally, as well as from the standpoint of 
the poorer classes. 

(c) The additional argument given in the last sentence is simply 
silly. Of course the money isn't lost. Money is one of the most durable 
forms of capital, engaged in the business of facilitating exchanges. 
Whether the use of money in buying a particular kind of goods is 
wasteful or not cannot be tested by watching what happens to the 
money. The money in the case merely assists in the process of ex- 



46 PAGES 215-219; 225-226 

change. The things to watch are the goods bought with the money. 
If their destination is satisfying one's vanity and spirit of ostentation, 
or, even worse, paying for vicious gratifications, moralists have a right 
to complain that wealth is being wasted. 

Problem 18 

(b) See pages 211-212. 

Problem 19 

It is for the interest of the producer to dispose of his goods in the 
best market. In accord with this principle, we habitually sell to Europe, 
which without doubt is a far better market for most of our exports than 
South America. But, unless Europe can sell to us in return or to some 
other countries from which we wish to buy, she cannot buy from us, 
and so cannot continue to furnish the good market assumed. Now, 
Europe cannot sell to us enough to offset our sales to her, because we 
have relatively small need for her products. However, if she can dis- 
pose of a c()nsideral)le volume of goods to South America this will 
answer just as well, since we want to buy extensively from South 
America, and so we are glad to take Europe's credits on South America 
to be used in paying for our purchases on the latter continent. In short, 
leaving the South American trade to Europe is, in some sense, a con- 
dition of oiu- having a good export market in Europe. 

Problem 20 

Manifestly, ( lermany could pay at the most but $300,000,000 of the 
indemnity in gold, except as she imported that gold from other coun- 
tries; if she paid an indemnity of $40,000,000,000, she would need to 
import $39,700,000,000 of gold. But she could not import this gold 
without exporting an equal amount of commodities or services to pay 
for it. 

Pages 225-226 
Problem 1 

(a) The comparative costs referred to in our principle as appear- 
ing in this particular case, are 10 days as compared with 5 days, and 14 
days as compared with 6 days. That is, the one set of comparative costs 
is 10 over against 5, and the other set of comparative costs is 14 against 
6. Because 10 over 5 and 14 over 6 are not equal fractions, therefore, 
exchange will in this case be profitable. 

( b) See page 225. 

(c) Country A will export iron. 



PAGES 225-226; 236 



47 



Problem 2 

If we suppose that in country A the costs of iron and cloth are, as 
before, lo days and 5 days, while in country B they are 14 and 7 days, 
then exchange will not pay. For in each country one ton of iron will 
be worth two yards of cloth ; and, so, neither country can gain by ex- 
changing its goods, whether iron or cloth, for the goods of the other 
country. 

Problem 3 

If we assume conditions such as given in Problem i, then the 
second country, B, could profit by giving country A in exchange for a 
ton of iron any amount of cloth smaller than 2.33 yards, since the latter 
is the least cost of iron in terms of cloth at home. Let us suppose, 
now, that the rate of exchange favors country A to substantially the 
highest degree possible, making a ton of iron able to buy 2.33 yards of 
cloth. On this hypothesis 2.33 yards of cloth cost A only 10 days' 
labor, since this is the cost of the ton of iron with which it buys that 
cloth. On the other hand, these 2.33 yards of cloth cost country B 
2.33 times 6 days or 13.98 days. Hence country A gets the cloth at a 
cost in labor which is 3.98 days smaller than its cost in labor to the 
foreign country, B. 

Problem 4 

The reason given is not quite satisfactory, because it implies that 
England must be absolutely superior to us and we absolutely superior 
to her in order- to make the trade profitable. As brought out in the' 
text, sucli absolute superiority is not necessary, although it would un- 
doubtedly produce the result. It is enough that England should be 
relatively superior to us in the production of ships, and that we should 
be relatively superior to her in the production of something else. 

Problem 5 

Southern California is so greatly superior to most other parts of 
the world in respect to the production of citrous fruits and walnuts that 
it would probably be more profitable to specialize in these industries 
even if it were greatly superior to other districts in the production 01 
wheat. 

Page 236 
Problem 1 

(a) $.93 -[- $.021/2 = $-95V2 = total cost cash wheat by May. 

— $-95V2 -|- $-70 z= —$.251/2 :i= loss per bu. on cash wheat. 
+$-95y2 — $70 = -f $.25V2 = gain per bu. on May wheat. 



48 PAGES 236; 240-241; 244 

(b) No. 

— $-95y2 + $1.10 = -|-$-MV2 = gain on cash wheat. 
+ $•95^2 — $1-10 = — $.141/2 = loss on May wheat. 

(c) Carrying means bearing the burdens of ownership. 

Problem 2 

If there were no speculative trading, the rise in price which would 
naturally result from the shortage in the wheat crop would not take 
place until the shortage had been realized. But, of course, this could 
not be till a very considerable time after the crop had been harvested, 
for at the beginning of the postharvest period the crop is bound to be 
vastly in excess of the immediate demand. It follows that without 
speculation, even though the crop were short, the price would be very 
low at the beginning of the postharvest period and would rise only quite 
late in that period. Such a postponement in price change would 
diminish greatly its efficacy as a regulator, not only in respect to the 
consumption of the immediate crop, but also in respect to production 
for the future. This would be especially true in the case of crops which 
are put in almost a complete year before the harvest, or for which any- 
how the soil is prepared at such an early date . All this is fundamentally 
altered when speculative trading is highly developed. In 1915 the 
inevitable shortage in wheat was clearly anticipated as early as June, 
and was manifested in a very high price. Plainly this would tend to 
diminish consumption and would stimulate the preparation of a much 
larger acreage to be devoted to the raising of wheat. Farmers would 
hasten to put in winter wheat during the following August or Septem- 
ber and start the preparation of the soil for the spring wheat of the 
next season. 

Pages 240-241 
Problem 1 



$7000 X 7 



= $49- 



$2000 X 18 

= ^S6. 



Problem 2 



1000 



Problem 3 

^$100,000 
No. $250 X 500— ( h $10,000) =$125,000 — $43,333.33^ 

^ $81,666.66-]- := the gain from self-insurance. 

Page 244 
He would doubtless say "the annual gold product of the United 
States has a value of ninety millions dollars." 



PAGES 256; 260; 267 



49 



The statement quoted violates the principle laid down with respect 
to both demand and supply, that every legitimate statement as to the 
quantity of either of these moments must contain, explicitlv or im- 
P'licitly, an indication of the price at which the given quantity of de- 
mand or supply would he forthcoming. 

The writer might have meant that the demand for labor at a rate 
of wages wliicli he considers at all legitimate would be less than the 
amount offered; or, again, that the demand for labor at a price zvhicli 
the laborers insist upon getting is almost always less than the amount 
offered at that price; or, perhaps, that the demand for labor at a price 
zeliicli any right-minded person Ziwuld approve is almost always less 
that the amount offered at such price ; or, again, that the demand for 
labor at a price which laborers zvould insist upon getting is almost 
always less than the amount of labor which is seeking enq)loyment at 
some price or other — the stock of potential labor. 

Page 260 

This probably needs no conmient. It might be well to emphasize 
the point that the statement quoted does treat the two inomeMts, "price," 
on the one hand, and "supply" or "de»^and,"' on the other, as reciprocally 
dependent, just as the roots and leaves of a plant are reciprocally 
dependent. 

Page 267 

Problem 1 



Demand 








Price 


Cords 








Dollars 


I 








6 


2 








5-75 


4 








5-50 


7 








5-25 


10 








5 


17 








4-75 


25 








4-50 




Problem 2 




Demand 








Price 
Dollars 


I 








200 


- 2 








175 


4 








190 


5 








140 




and 


so 


on. 





50 PAGE 267 

Problem 3 

(a) At 68 cents 66,ooo ounces and only so much are demanded. 
We cannot tell, however, whether any part of these were brought in by 
the fall of price to 68 cents ; the last increment may have come in at 
some figure higher than any in our schedule. 

A fall to 67 cents would bring in an increment of 4,000 ounces; a 
rise to this point, however, would make no difference. 

Neither a fall nor a rise to 66 cents would make any difference in 
the volume of demand. 

A fall to 55 cents would not alter demand ; but a rise to this figure 
would cut it down by 13,000 ounces. 

A fall to 54 cents would increase demand by 13,000 ounces; a rise 
would cut it down by 12,000. 

A fall to 53 cents would increase demand by 12,000 ounces; a rise 
would not change it. 

A fall to 52 cents would not alter demand ; a rise to that figure 
would cut it down 11,000 ounces. 

A fall to 51 cents would increase demand by 11,000 ounces; what 
a rise to this figure would do we cannot tell without more data than the 
talile supplies. 

(b) 67c — the 4,000 added at 67c. 
65c — the same. 

. 63c — the 8,000 added at 63c. 
59c — the 8,000 added at 62c. 
57c — the 13,000 added at that price. 
55c — the same 13,000. 

(c) 66c — the 14 thousand added at 64c. 
65c — the same. 

61 c — the 7 added at 58c. 

59c — the same. 

54c — the 12 added at 53c. 

(d) 67c — 67c. 
66c — same. 
63c— 63c. 
60c — 62c. 
56c— 57c. 
52c — 52c. 

(e) 65 c — 64c. 
66c — same. 



PAGES 267; 276-277 51 

67c — same. 
63c — 62c. 

(f) 66c — those who came in at 67c. 
53c — those who came in at 53c. 
55c — those who came in at 57c. 
60c — those who came in at 62c. 
54c — ^those who came in at 54c. 

(g) 66c — those who would come in at 64c. 
65c — those who would come in at 64c. 
6ic — those who would come in at 58c. 
58c — those who would come in at 57c. 
56c — those who would come in at 54c. 
52c — those who would come in at 51c. 

Pages 276-277 

Problem 1 
No explanation needed. 

Problem 2 
Notice the "more" appearing in three cases. 

Problem 3 

(a) From the last line we can only say that supply will be 60 and 
no more if price is 51 cents. We cannot know that this supply will 
appear only if price is 51 cents; it might have come in at some earlier 
figure. 

A rise of price to 52 cents would increase supply by 12 units; a 
fall to this figure would make no difference. 

A rise to 53 cents would make no difference; a fall to this figure 
would reduce supply by 13 units. 

A rise to 54 cents would increase supply by 13 units; a fall to this 
figure would make no difference. 

Neither a rise nor a fall to 55 cents would make any difference. 

A rise to 59 cents would make no change; a fall to this figure 
would decrease supply by 12 vmits. 

A rise to 60 cents, increase of 12 units; a fall, decrease of 8 units. 

A rise to 61 cents, increase of 8 units; a fall, no change. 

A rise to 62 cents, no change; a fall, no change. 

A rise to 63 cents, no change; a fall, a decrease of 15 units. 

A rise to 64 cents, increase of 15; a fall, decrease of 7. 

(b)' 55c — the 13,000 added at 54c. 
60c — ^the 12,000 added at 6oc. 



52 PAGES 276-277 

63c — the 8,000 added at 6ic. 
'58c — the 6,000 added at 58c. 
52c — the 12,000 added at 52c. 
65c — the 7,000 added at 65c. 

(c) 54c — the 9,000 which would be added at 57c. 
56c — the same. 

59c — the 12,000 which would he added at 60c. 
64c — the 7,000 which would be added at 65c. 
67c — the 13,000 which would be added at 68c. 

(d) 67C-66C ; 65C-65C ; 63C-61C; 62C-61C; 59C-58C ; ■55C-54C. 

(e) 66c-68c ; 63C-64C; 61C-64C; 59C-60C; 55C-57C; 52C-54C. 

(f) 67C-66C sellers; 64c -64c sellers; 63C-61C sellers; 59C-58C sel- 
lers; 56C-54C sellers; 54C-54C sellers. 

(g) 66c-68c sellers: 61C-64C sellers; 59C-60C sellers; 58C-60C sel- 
lers ; 55C-57C sellers ; 52C-54C sellers. 

Problem 4 

The marginal producer is necessarily the one who will first drop 
out if prices fall, since he is one who brings in the marginal producers 
tiiciit of supply. But the quotation implies that the particular producers 
commented upon tcoiild not drop out Iwzvcvcr much price should fall: 
they are "taking losses," slowly passing into bankruptcy. Consequently, 
they cannot be marginal producers. See page 569. 

Problem 5 

To say that Mr. A may be producing the marginal increment is to 
say that he may be that producer who would be the first one to with- 
draw if price should fall. This would be possible if he insisted on get- 
ting for himself a clear gain of 6 cents on each unit of output, while 
Mr. D demanded only 2 cents. In that case, A's supply price would be 
12 plus 6 cents or 18 cents, while B's supply price would be 15 plus 2 
cents, or 17 cents. Under those conditions, a fall in price from 18 cents 
to 17 cents would cause A to withdraw from the field but would not 
cau.se B to do so — a result which would prove A to be the producer of 
the marginal increment. 

Problem 6 

The attitude of laborers determines supply ])rices only; but the 
supply price which hinders price from going down is the marginal one ; 
finally, the marginal supply price is that supply price which is the 
highest, not the lowest, of all the actual supply prices. 



PAGE 288 



53 



Problem 1 

(a) It is inconsistent with the law of single price. 

(b) On account of the excitement, noise, and crowding, the market 
did not really constitute a single market in the sense of the principle 
— it was really broken up into many markets. 

Problem 2 

(a) If physicians could get rid of the law of single price, they 
could get from each patient what the service was worth to him instead 
of what it was worth to the marginal buyer, and so could keep to them- 
selves the whole consumer's surplus. 

(b) (i) The services of each physician are in a degree siii generis. 
The patient wants him rather than anyone else. 

(2) The conditions are such that patients or their relatives dislike 
to bargain in advance. Hence, in the matter of price, they are largely 
at the mercy of the physician. 

(3) The services of a physician being non-transferable, those 
persons who get such services at a low price cannot play the role of 
middletnen and sell them to others — a process which in many other 
cases might defeat the efforts of any monopolist to override the law' of 
single price. 

Problem 3 

In the first l^lank, insert the word "excessive" ; in the second, the 
word "fall." 

Problem 4 

(i) As a result, price rose: {2) this made profitable the cultiva- 
tion of inferior lands where cost was higher, and so a new supply, etc. 

Problem 5 

Perhaps the easiest way to show the absurdity of this statement is 
to point out that if it were true, price could never rise at all. 

More thoroughly treated, the trouble with this reasoning is that it 
confuses changes in the demand schedule with those dift'erences in 
demand consequent on differences in price zvhich belong to the same 
schedule. The increase which appears in the first sentence would mean 
an increase in the demand schedule, that is, an increase all along the 
line, anyhow an increase at some figure or figures higher than the old 
market price. The cutting down of demand as price advances which 
takes place n'ithin every schedule is an essential feature of every 
schedule, involving no true change in that schedule. Now, unless the 
new schedule had showed such an advance that demand at some price 
higher than the old market price was great enough to keep market price 



54 PAGES 288; 296-297 

at that higher figure, price would not have risen at all. But if, in the 
new schedule, demand was large enough to fulfil this condition, it could 
not have ])een small enough to let price drop hack to its old place. A 
thing cannot lioth he and not he at the same time. The truth which 
might he suggested hy the second sentence is that price could not rise 
as hig-h as we might expect from a mere comparison of the new demand 
at the old market price with the old demand at the same market price. 
As price rises, demand falls, /// flic scniic sclicdiilc; and so, an equili- 
hrating price is reached sooner than we might naturally expect. 

Problem 6 

First I)lank, Increased; second blank, fell; third, increase; fourth, 
increased. 

Pages 296-297 
Problem 1 

Buyers do not hid prices down, though of course they would prefer 
to have them low ; sellers do not hid prices up, though of course they 
would prefer to have them high. 

The truth of the first half of the statement is proved l)y the fact 
that the maintenance of both the lower limits of price depends im- 
mediately on the action of buyers: it is the buyers who must not permit 
price to go below the marginal supply price, nor down to the first extra- 
marginal demand price. The truth of the second half of the statement 
is j)roved hv the fact that the maintenance of both of the upper limits 
of price depends innnediately on the action of sellers: it is the 'sellers 
who must not permit price to go above the marginal demand price nor 
up to the first extra-marginal supply price. 

Problem 2 

It is the attitude of sellers which makes it necessary for buyers 
not to permit jjrice to go below the marginal supply price; it is the atti- 
tude of ])uyers which makes it necessary for sellers not to permit price 
to go above the marginal demand price. 

Problem 3 

The simplest way, perhaps, is to make demand 120,000 ounces at 54 
cents, 53 cents, and 52 cents; and to make supply 130,000 at 58 cents and 
57 cents. 

Problem 4 

( I ) The demand at a price above zero must be as great as possible 
supply at that price, else the marginal buyer could not afford to bid price 
up to that point, since his valuation is no greater than zero. 



PAGES 296-297; 310 55 

(2) The demand at zero price must be greater than possible supply 
at that price, else marginal and intra-marginal buyers would not need to 
bid price above that point in order to exclude cxtra-inargiual buyers. 

Problem 5 

This seems to imply that the price would go up because the cxtra- 
niarginal buyers would offer the higher price. Obviously this is im- 
possible, since, as extra-marginal buyers, their coming in at all was con- 
ditioned on the presence of the lower price. Their competition would 
drive price up only in tlie sense that their potential competition, if price 
sliould go down, would drive the marginal or intra-marginal buyers to 
offer the higher price. 

Problem 6 

This overlooks the fact that a limit is set by the importance of labor 
services to the first extra-marginal employer. This is a very common 
and very pernicious fallacy. Mill emphasized it years ago by pointing 
out that wages are kept up by the competition of employers just as they 
are kept down by the competition of laborers. 

Problem 7 
See pages 295-296. Doubtless all demands and all supplies share in 
the process of price determination ; but the influence of all come to a 
focus in the marginal and first extra-marginal ones. 

Page 310 
Problem 1 

The word "normal" as used by the economist in connection vvitli 
price does not connote that "which usually prevails." Doubtless we 
often use the term normal in this sense. Thus, when we speak of the 
normal condition of things as contrasted with that prevailing during the 
years of 1914 to 1920, we mean a condition which is usual, present in 
ordinary times. But the word is not so used in the phrase "normal price." 
There it means, as explicitly stated, a price which the principal forces 
operating throughout a given period tend to establish. Instead of being 
identical with the usual price, it rarely even coincides with that price. 

Problem 2 

This obviously shows a failure to understand what is meant by nor- 
mal price. It is the price which is tending to prevail throughout a given 
period because. of the influence of forces continuing through that period. 
The prices which were constantly changing were of course market, not 
normal, prices. In fact, it would lie foolish to attempt to work out in 
any serious way normal prices for such a period. 



56 • PAGES 310; 319-320 

Problem 3 

Such limits are furnished by the marginal and first extra-marginal 
demand prices, l-iut, in turn, these demand prices are ultimately fixed 
by marginal and first extra-marginal utilities or significances. Hence the 
proposition laid down. 

Pages 319-320 
Problem 1 

No. This is all a matter of standpoint. From that of the entre- 
preneur, they are a cost; from that of the laborer, they are a remunera- 
tion. The former is of course the ,stand|)oint which interests us in oiu' 
present connection. 

Problem 2 

X'ery likely not. I'irst, reniemlicr that the marginal unit in supply is 
not necessarily the one involving the greatest absolute disuiility. The 
marginal unit is in all cases the one the presence of which is conditioned 
on the presence of the marginal price. This is a matter not so much of 
the al)solute disutility of the sacrifice as of the supplier's csliinate of that 
sacrifice. Secondly, remember that, generally speaking, tlic supply price 
of any commodity is determined over the who'e fie'd of production for 
that commodity, not in each particular factory. 

Problem 3 

This is perhaps sufliciently commented upon on pages 317-318. 
Building-site rent is usually an opportunity cost, l)ecause such sites are 
wanted for many purposes and it is usually that fact which compels 
tenants to pay rent for the privilege of using them for their particular 
purpose. If, instead, this compulsion is due to the fact that other tenants 
wanting them for the same purpose come on the market, then their rent 
is not a cost. 

Problem 4 

It all turns on whether providing for the pay-roll involves keeping 
a corresi)onding amount of money, that is, $600,000, invested all the 
time. If this whole amount is provided out of current receipts, then, of 
course, it is not reasonable to ask that profits should be earned upon it. 
As a matter of fact the meeting of this pay-roll of $50,000 a month will 
probably require a permanent investment of some sum of money, though 
by no means $600,000, nor even $50,000. \'ery likely the company would 
go to the bank some time before pay day and borrow at least a portion of 
the $50,000, which sum they might pay up in two or three months. But. 
Iiowever this might be, the whole matter turns on lioic i>iiicli is on an 



PAGES 319-320; 330-331 



57 



average permanently invested in order to meet the need in question. 
Only on that much is it reasonable that profits should be earned. 

Pages 330-331 
Problem 1 

Answer: $45. It could not be $50, since at that price only 7 are 
wanted while 12 are for sale, and the persons who would fail to sell the 
five extra ones would lower the price in order to insure disposing of 
their wares. On the other hand, the price could not be $40, since at that 
figure the demand would be for 18 while supply is only 12, and the 
desire of buyers to get the extra 6 units would lead them to raise the 
price to the former figure. 

Problem 2 

(a) Answer: $1.20. It could not be $1.25, since at this figure the 
amount wanted is 200 millions less than the output, and so, the desire of 
sellers to get a market would induce them to bid price down. On the 
other hand, the price could not be $1.15, since at this figure demand is 
200 millions in excess of the supply, and, so, the desire of buyers who are 
willing to give $1.20 to insure getting their 2,000 millions will induce 
them to bid up the price to this figure and thus exclude those who are 
willing to buy only at $1.15. 

(b) Answer: Marginal significance or utility. 

(c) Answer: $1.25. The reasoning is the same as under (a). 

(d) Answer: $1.30. Reasoning as before. 

(e) Answer: $1.10. 

Problem 3 

(a) The plague had greatly reduced the supply of labor — according 
to some authorities by one-third. For practical purposes we simply 
assume that the whole possible supply would be turned into actual supply, 
that is, we should have here a fixed-supply supply schedule. The price 
of labor, therefore, would turn solely on the demand schedule. Suppos- 
ing that the demand schedule remained unchanged, supply and demand 
would come to equality, and so establish a price, only when the price of 
labor had risen considerably above the former level. Rogers estimated 
that it actually rose 100%. 

(b) Since the supply of labor is much smaller than before, while 
the schedule of significances or utilities is the same, the significance or 
utility of the least important portion of the labor supply, that is, its mar- 
ginal significance or utility, is bound to be much greater than before. 
But assuming that for practical purposes this labor is a constant-supply 



58 PAGES 330-331; 335-336 

good, price must tend to be such as will express the marginal significance 
or utility of said labor. Hence price is bound to rise to a higher figure. 
(c) This method of expression is very faulty, though common 
enough even with educated men who are untrained in economics. The 
evident fact is that demand is unchanged. It is supply which has been 
altered. Doubtless the phrase "for the laborers who were left'' relieves 
the fault somewhat ; but such method of expression is after all too in- 
exact. The real point is that the falling off of supply has made a differ- 
ent increment of demand the marginal one, hence has changed the mar- 
ginal utility and significance, so has changed the marginal demand price, 
and therefore the market price. 

Pages 335-336 
Problem 1 

Answer: The principle just given. If cement could be put on the 
market in unlimited amounts at a cost of $1.75 per barrel, it could not, 
in the long run, sell much above $1.75. 

Problem 2 

(a) After the chair-making industry had already passed into the 
stage where the cost of production was 30 cents, it might still easily be 
true that not a few chairs in the stock of dealers had cost $1 each. But, 
so long as the present cost was only 30 cents, the price would, of course, 
be only 30 cents. The fact that particular chairs had had a higher cost 
would have no influence whatever upon their market price at the present 
time. Librarian Davis often told of a rare, old store-keeper in a little 
Maine village who made a practice of refusing to sell that part of his 
stock of any commodity which had cost more than the present market 
price at the same price as he sold his new stock. As a natural conse- 
quence, his garret and cellar were full of stock which he could not dis- 
pose of at all. 

(b) Not at all. The principle in question contains the condition 
"the continued production of which is demanded," as also the condition, 
always implied, that other circumstances remain unchanged. So long 
as these conditions are fulfilled, the price of a commodity tends to equal 
its cost of production — not because that zvas its cost, but because it is the 
cost zvJiich zvouJd he necessary to replace the commodity. 

Problem 3 
Price rose to $1.50 per gallon; because the cost of producing whisky 
was in effect raised to this point, and so, under the working of the 
principle given on page 335, price was raised to this point. (The dis- 



PAGES 335-336 59 

tiller could not put his product on the market without incurring this ex- 
pense for the tax just as he incurred other expenses for grain, lahor, etc.) 

Problem 4 

(a) The author means to affirm that marginal utility alone fixes 
price. If. when cost of production falls, marginal utility does not also 
fall, price will not fall. ( Note carefully the last three lines of the 
quotation.) 

(b) The most adequate way of showing that, in the case before us, 
price would fall to cost of production even though marginal utility re- 
mained much higher, is to remind ourselves that the only demand price, 
and so the only utility, which can set a lozn'cr limit to price is the first 
extra-marginal one. This is clearly brought out in the discussion on 
page 290. The marginal demand price may hinder actual price from 
going higher, but not from going lower. The necessity that buyers at 
the demand price should bid price up to their figure in order to exclude 
other buyers, arises only provided there are extra-marginal buyers at 
this same price or at one just below this one. But, in the case before 
us, neither of these conditions is fulfilled. By hypothesis, producers can 
supply at the new lower cost of production far more product than is 
wanted at any price — this is the very ground of the author's contention 
that price would not fall in this case. In other words, the first extra- 
marginal demand price or utility is zero. Price, therefore, could fall to 
zero and still there would l)e no competitors against whom buyers at 
the marginal demand price would be ol)liged to bid. Demand prices, 
therefore, have here no part in holding actual price up to the marginal 
demand price or the utility. In consequence, the lower limit of price is 
in this case fixed by marginal cost solely. Buyers must bid price up to 
cost in order to retain supply ; but they do not need to bid it any higher 
than this. 

A simpler argument than the above will very likely be presented by 
the students, and will fairly meet the demands of the case. It would run 
something like the following: If, while cost falls 50 per cent, price 
remains unchanged, producers will be getting an excessive profit, and 
the desire of each one to increase his share of this profit will lead him to 
underbid rivals. This process cannot cease till price is as low as cost. 
This will be true, even if there are no lower levels of demand to take up 
the commodity at a marginal utility as low as the new price. In such 
case, even the marginal unit of supply will yield a large consumer's 
surplus. 



6o PAGES 335-336; 340-341 

Problem 5 

The $30 is certain to be shifted to the tenant in the shape of a 
higher rent, because the house, being a producible economic good, has its 
value and the value of its uses fixed by cost, of which cost the tax is a 
part just as much as the stone, lumber, labor, etc., necessary to make the 
house. 

The $12 will not be shifted to the tenant, because land is not a pro- 
ducible but a fixed-supply good, the price of which is determined by its 
marginal significance or utility — an element which is not altered by the 
imposition of this tax. Taken in another way, the rent of the land is 
bound to be all its use is worth whether there is a tax on it or not. If a 
tax is put on, this does not make the use of the land worth any more, 
and so cannot raise its price ; it simply cuts down the landlord's income. 
An objector will sometimes point out that real estate investors would not 
put up with a return on that part of their capital invested in land smaller 
than the return received from the capital invested in the house. Surely 
not. But, in the case of land, the establishing of the proper ratio be- 
tween the capital invested and the income received will be brought about 
by a loivering of the vaJiie of said land, ivhilc, in the case of the house, 
it will be brought about by a raising of the income from the house. 

Pages 340-341 
Problem 1 

(a) No need for comment. 

(b) Answer: 59 cents. Sellers would keep the price from going up 
to 60 cents, both to retain the 59 cents demand and to exclude the 60 cents 
supply : buyers would keep the price from going down to 58 cents, both 
to retain the 59 cents supply and to exclude the 58 cents demand. 

(c) Answer: 60 cents. Proof as before. 

(d) Both marginal significance and marginal cost. 

Problem 2 
Even if we are content to accept marginal cost as an adequate ex- 
pression of all the forces at work in price determination, we anyhow 
must recognize that marginal cost itself is not fixed but varial)le. It will 
be smaller, if demand, and so output falls otY ; it will be larger, if de- 
mand, and so output increases. Accordingly, we may say that, as far as 
the general principle is concerned, there is no reason why the price of^ 
silver should not have risen to $1.29. or to any other figure, if the pro- 
posed action had been taken by the United States government. Doubt- 
less, however, no such result would in fact have followed, for the reason 



PAGES 340-341 6l 

that the increase in demand resulting from the proposed action would 
not have been anything like large enough to bring about the results indi- 
cated. But this point is not involved in the principle as a mere principle. 

Problem 3 

(a) Answer: 59 cents. The usual proof. 

(b) Same as under (a). 

(c) Same as before. 

(d) While demand at 59 cents ranges between 175 million and 500 
million, price is determined by cost of production simply, marginal sig- 
nificance or utility not playing a vital role. 

Problem 4 

(a) Fill the blank with these words: "would become effective, the 
new output would be used to furnish lower and lower utilities, and thus 
the new marginal utility would adjust itself to the price." 

(b) In the original quotation Seligman says marginal cost will do 
so and so, "if the marginal efiiciency or value of silver should rise," im- 
plying that a new marginal efficiency of silver could be fixed without 
regard to marginal cost — and this is plainly necessary to his argument. 
But, surely, marginal utility could not be fixed independently of output, 
and output could not be fixed independently of the relation of price to 
cost. 

On the other hand, the second quotation implies that marginal cost 
would be fixed independently of marginal utility. But this is, of course, 
quite impossible. Marginal cost could not be fixed independently of the 
price, nor this independently of marginal demand price or utility. 

Taking the case of the first hypothesis, it is doubtless true that the 
first effect of the new condition would be a rise in price brought about 
by a rise in the marginal utility of the present output. Again, the second 
effect would be as indicated, that is, would be to cause inferior opportuni- 
ties for getting out silver to be worked. But here the argument stumbles. 
The working of the inferior opportunities does not merely tend to adjust 
marginal cost to price and marginal utility. Because it increases output, 
it also hinders the nezv price from rising to the point it would have 
reached under the influence of the new demand schedule alone. In short, 
the new price of Seligman was only a provisional one ; the definite one 
established by the new conditions would necessarily be one in the deter- 
mination of which marginal cost as well as marginal utility had partici- 
pated. 

Analogous reasoning would show that the new definitive price under 



62 PAGES 340-341; 346 

the substitute hypothesis would necessarily be one in the determination 
of which marginal utility as well as marginal cost had participated. 

To illustrate these propositions, the schedule of Problems i and 3 
may be used. Starting with the original output and demand schedule, 
suppose a sudden change to take place in the demand schedule from its 
original form to that of Problem 3 (c), by which the marginal utility of 
the 190 million which are being produced under the original demand and 
supply schedule becomes 65 cents. Doubtless, price would tend to ad- 
vance immediately to 65 cents. Whereupon, according to Seligman, the 
more expensive grades of silver would be marketed and marginal cost 
would advance to 65 cents, thus adjusting itself to price. But surely 
nothing of the sort would hap])en. While the immediate price would be- 
come 65 cents and so marginal utility would immediately coincide with 
price, in a very short time the interaction of the output and demand 
schedules would establish a price of 62 cents, not 65 cents, which price 
would express the new marginal utility and equal the new marginal cost 
of the amount marketed, namely 205 millions. 

Again, starting as before, suppose the conditions of production to be 
so changed that all producers, including those who are getting out silver 
at 59 cents, find their cost declining by 6 cents per ounce. Suppose, 
further (what is not very likely), that said producers promptly bid down 
the price to the new marginal cost of 53 cents. According to our substi- 
tute quotation, the latent layers of demand at lower prices would at once 
become effective; and a new marginal utility of 53 cents would promptly 
be established. That is, marginal utility would adjust itself to a price 
determined by cost. But surely nothing of the sort would happen. As 
soon as the new output schedule and the old demand schedule had had 
time to come to an equilibrium, a price of 56 cents, not 53 cents, would 
be established — a price which would at once express the marginal utility 
and equal the marginal cost of the 205 million ounces put on the market. 

Page 346 
Problem 1 

Veal, hides. 

Problem 2 

See the discussions of Taussig and Pigou in the Quarterly Journal 
of Economics, February, May, August, of 1913. Taussig takes the affir- 
mative position, building on these two facts: (i) a large part of the 
costs are common costs, and (2) these two different cases of transporta- 
tion have different demand schedules. Pigou takes the negative position 



PAGES 346; 350-351 63 

principally for these reasons: (i) By-products must be necessary result- 
ants from the productive process and not incrcly possible ones. (2) We 
should never treat different uses of the same product as dift'erent prod- 
ucts. Transport, whether it be the transport of dry goods or that of 
coal, is one homogeneous product. (3) Where we have a case of real 
joint-cost products, the principle laid down above will apply even if we 
have perfect freedom of competition. But, in the case of railroad trans- 
portation, the discrimination involved could not work out unless there 
were monopoly. I am rather inclined to think that Pigou has the better 
of the argument. 

Problem 3 
The increased use of cotton-seed oil naturally raises the total value 
return from the cotton crop. But this total cannot in the long run be 
greater than the cost. The price of cotton itself must therefore fall to 
bring about the necessary equality of total return and total cost. 

Pages 350-351 
Problem 1 

Answer: $771.43. Since you can get 7 per cent per annum upon 
whatever capital you have to invest, and you can get on each share of 
this stock $54 per annum, the price which you should be willing to give 
for a share would be as much as .07 is contained in $54, which is $771.43. 

Problem 2 

Answer: $528.57. 

Problem 3 

Answer: $105.26. If the government bond is yielding 2 per cent 
interest, then that means a total yield of $2 per annum. But, if the aver- 
age return on securities of this grade is only 1.9 per cent, then you ought 
to be willing to give for the bond which yields $2 as much as .019 is con- 
tained in $2, which equals $105.26. 

Problem 4 

Answer : $30,909.09. 

Problem 5 

(a) Since by hypothesis the state takes in the shape of a tax 93 
per cent, this would leave for the owner only 7 per cent of $51,000, 
which is $3,570. This sum capitalized at 5 per cent will give $71,400, 
which is the natural value of the property. 

(b) If the rate of taxation were raised to 100 per cent, the income 
would, of course, be reduced to zero. But a zero income capitalized at 



64 PAGES 350-351; 354 

5 per cent will give a zero value for the income-bearer, i.e., the property 
would become worthless. 

Problem 6 

You would expect the price of such a bond to fall greatly. By hy- 
pothesis, it yields only 2 per cent, that is, $2 on $ioo; and, since the rate 
of interest is exceptionally high, the quotient resulting from dividing $2 
by the current rate of interest, i.e., the value of the bond, will be excep- 
tionally small. 

Problem 7 

In the first case, $3,750. In the second, $5,000. In the third, $6,000. 

Problem 8 

This is not a reasonable problem. The automobile is a producible 
good, and hence its income cannot be fixed independently of its cost. 
If at any particular time the income is too great in view of what it 
costs to supply automobiles, that income will fall until it constitutes a 
reasonable return at the ordinary rate of profit on said cost. That is, in 
this case of producible income-bearers, the price of the income-bearer 
itself is first determined, and then the income adjusts itself to this price. 

Problem 9 

Answer: $544. Since the auto costs $1,200 and lasts only three 
years, it must earn $400 a year to pay for itself. Since it is to earn in 
addition- 6 per cent interest and 6 per cent profits, a total of 12 per 
cent on the $1,200, i.e., $144, must be added to the $400, making a grand 
total of $544. (Obviously this solution is not exact, since it ignores the 
fact that the value of the auto has diminished at the end of the first year 
and still more at the end of the second year. However, this will do for 
our purposes.) 

Problem 10 

Interpreted to mean that, in view of one or more outside demands 
for the site at a rent justifying a price of $22,000, any particular business 
can afford to use that site only on condition that it yields a surplus of 
$1,320, the problem is legitimate. Interpreted as meaning that, in view 
of the fact that the site is antecedently worth $22,000, businesses in gen- 
eral must yield a surplus of $1,320 if the site is to be used at all, it is 
illegitimate. 

Page 354 
Problem 1 

(a) $115. 

(b) $115. 

(c) $75 and $100. 

(d) $50 and $100. 



PAGES 354; 354-356 65 

Problem 2 

The reason which was believed to have detennined managers of the 
trust was that if the price was unduly raised, it would invite outside pro- 
ducers into the industry and so increase competition. The purpose of 
this problem is to call attention to the significant fact that trusts of this 
sort are caf^italistic monopolies — monopolies which can maintain their 
exclusive powers only by refraining from keeping prices greatly above 
ordinary cost. 

Pages 354-356 
Problem 1 

The price would be $45. It could not be above this, for at any 
higher price sellers would not be able to dispose of the whole eleven 
specimens and hence would bring down the price to $45 where all would 
be taken. On the other hand, the price could not be under $45. since 
even at this figure more are demanded than supplied and the competition 
of the persons wishing to get them at this price, as against possible buyers 
at lower figures, would hold the price up to this figure. 

Problem 2 

(a) A tax of $5 would make no difference in the price. A tax in- 
fluences prices only because it adds to the cost of production and, so 
raises the marginal supply price of a certain output. Even then it has 
no influence unless the case is such that the marginal supply price, rather 
than the first extra-marginal demand price, constitutes the lower limit of 
price. But, in the case before us, this is not true. The objects in ques- 
tion have today no cost of production other than the tax. Their supply 
price, therefore, is only $5. On the other hand, their first extra-marginal 
demand price is $45. It follows that the first extra-marginal demand 
price, rather than the supply price, sets the lower limit of actual price ; 
and so the tax, which affects only the supply price, has no part in the 
matter. 

(b) The burden of this tax in the end, as at the beginning, would 
be borne by the sellers of the eleven specimens. 

Problem 3 

(i) The reason for preferring cost of reproduction to cost of pro- 
duction is that the word production possibly implies to some minds that 
the value of the thing is determined by the cost of producing that very 
thing itself — that the reason why its value is so and so is that its cost of 
production hds been so and so. So understood, the statement would be 
untru£. The reason why cost of production enforces itself upon values 



66 PAGES 354-356 

is that we cannot get the article in question replaced unless in future we 
cover its cost of production. This possible misunderstanding is fully 
guarded against by saying cost of reproduction . instead of cost of pro- 
duction. 

(2) An assumption implied in the very idea of normal price is that 
the conditions are constant; and in fact this is implied in the statement 
of any natural law. A has a certain relation to B, provided the condi- 
tions in any case to which the principle is applied are the same as those 
for which the principle was laid down. But if, in the case before us, 
we assume the conditions to be unchanging, then cost of production is 
the same thing as cost of reproduction ; and so it .is unnecessary to 
change to the latter phrase. 

Problem 4 

This statement overlooks the fact that the livery business is one 
which is open to competition. We do not have here a case of fixed-supply 
income-bearers. Livery plants can be produced — must, in fact, be pro- 
duced. Their value, then, is not determined by their income. If a tax 
causes that income to fall off vmtil returns are less than in some other 
lines of business, these plants will not be renewed, supply will presently 
become inadequate, and prices will rise. That is, a tax of this sort is 
shifted forward upon cousu)ne)-'s. 

Problem 5 

(a) The words "which correspond to the values to the buyers of 
the thing sold" are useless as a definition of reasonable price; for, of 
course, every article sold is worth to buyers all that they give for it, 
else they would not pay that much. In the case of monopoly goods, just 
as truly as in the case of goods subject to free competition, values can 
never be greater than marginal utility, marginal significance. One p ould 
not conceive a kind of goods having a price greater than the one which 
would express its value to buyers. 

(b) The price commonly considered a reasonable one is the price 
which equals cost of production. 

(c) No. In most cases of monopoly goods, prices are undoubtedly 
higher than cost of production. 

(d) In the case of capitalistic monopolies where it is necessary to 
keep the price somewhere near the ordinary cost of production in order 
to shut out possible rival producers, this statement can be affirmed with 
a fair degree of accuracy. 



PAGES 354-356; 386 67 

Problem 6 

The doctrine implied is that, so long as there is freedom of competi- 
tion in any field, the profits earned in that field will not be unreasonable 
— assuming that some profits are reasonable and, in particular, that the 
profits commonly obtained in different lines of business at the given 
time and place are reasonable. This particular doctrine will come up for 
fuller discussion in a later chapter. 

Problem 7 

The cultivation of inferior soils could not bring back the price of 
wheat to its old place, since this cultivation of the inferior soil is con- 
ditioned upon the higher price. If, therefore, the price falls back, this 
cultivation of the inferior soils will cease, the demand will again be un- 
satisfied, and so prices will rise. What he should have said is this : The 
higher price leads to the cultivation of the inferior soil, which increases 
the supply of wheat so as to satisfy the demand, and thus hinders the 
price of wheat from rising to any higher figure. ( Similar to Problem 5, 
page 288.) 

Problem 8 

No, this price is not reasonable. It is obtained by dividing the net 
income of $700 by .08; but this is treating the matter as if it were a case 
of special privilege or monopoly. There is nothing in the hypothesis to 
imply that competition is excluded, and doubtless, with the evident 
profitableness of this business, that competition will soon become effec- 
tive. As the conditions of the problem state, the investment is only $500, 
and since this would only warrant an income of $40 clear, competition 
would soon brfng down the clear income of the business to this figure. 
The only reason for giving any more than that would be that the 
present incumbent has an opportunity which he personally has built up 
— a fact which makes him a more successful producer here than any new 
man could hope to become for a considerable time. This, however, is 
covered by saying that the good-will of the business is worth $500. A 
reasonable price then would be $500 plus $500, or $1,000. The size of 
the pay-roll has no bearing on the case. In addition to good-will, the 
only question is how much capital is really invested in the business, and, 
by hypothesis, there is only $500, including the bank account necessary to 
keep the pay-roll adequately provided for. 

Page 386 
Problem 1 

The principal reason why the prices of different commodities cannot 
be determined independently of one another is the fact that they are 



68 PAGE 386 

interchangeable, are capable of reciprocal substitution: if we lose one, 
we can replace it with another. In such case, the one first chosen cannot 
get a price higher than the possible substitute. Accordingly, our task is 
to show that, in special ways, labor units arc interchangeable. First, be- 
tween miners of all sorts, coal miners, iron miners, copper miners, there 
is always considerable freedom of movement, and so they are inter- 
changeable. The younger men, especially the unmarried ones, watch out 
for better opportunities and do not hesitate to make the changes 
necessary to improve such opportunities. Again, there is much freedom 
of movement between miners of all kinds as a group and laborers in other 
fields requiring similar capacities of body and mind. Thus, during the 
years 1918 and 19 19 there was a notable movement of miners from one 
copper district of Michigan to the city of Detroit to enter into the em- 
ployment of the manufacturers of automobiles and automobile parts. 
Finally, the nezv labor units, the ones coming from the new generation, 
are in large measure free to choose the field into which they will go and 
so are in a still higher degree interchangeable, capable of reciprocal sub- 
stitution ; they can choose mining or something else. The wages of 
miners, then, cannot be determined independently of those paid in other 
fields. 

Problem 2 
Practically everyone derives his income — and upon incomes the 
burden of taxation must of course fall — from the price of some service 
or services supplied by himself or his property. If, now, a tax be im- 
posed in such a way as to fall on income from one special employment 
of a particular type of service or from that type of service in general, 
at once the bearers of such a tax will set about trying to recoup them- 
selves by raising the price of that type of service in the special em- 
ployment or over the field as a whole. And, since under the principle 
before us all prices are interdependent and must form a coherent self- 
consistent system of prices, the efforts of these bearers of the tax are 
likely to prove successful, though time will be needed. For, unless they 
are successful, their type of services will be transferred to other fields 
or supplied in smaller amounts; and this process must go on until a 
price system which distributes the tax burden in the way consistent with 
the totality of conditions is effected. Finally, this would mean that the 
burden would be distributed in the same proportion for a given volume 
of revenue wherever it was collected at the outset. For, though the 
burden of different volumes of revenue would have to be distributed 
differently over a given community, the same volume could be dis- 



PAGES 386; 388; 391 6g 

tributed only in one way if said system is to be consistent with the 
totality of conditions present. 

The above is th^e general argument on which the doctrine above 
defended is based. Obviously, however, processes like these must take 
a long period to work themselves out, and, in the meanwhile, many 
changes might take place which would hinder the process of readjust- 
ment being satisfactorily effected. In short, authorities on finance 
do not consider the principle defended an adequate reason for indif- 
ference as to where the tax is first laid. 

Problem 3 

While a tariff' checks the competition of the producers of other 
countries, it offers no obstacle to the competition of producers in our 
own country. Capital would surely flow into a protected industry until 
profits in that industry had been brought to a common level with those 
of other industries. 

The second statement is substantially correct. As just noted, com- 
petition would inevitably eliminate any special profit to the protected 
industry, unless those profits had their origin in some condition other 
than the tariff, e.g., consolidation into a trust. The real burden would 
consist of whatever disadvantages flowed from the fact that we were 
not using our productive powers in the fields where our efficiency was 
highest. In some measure this would injure every member of the com- 
munity. But the chief burden would fall on the consumers of the product 
of the protected industry, since a higher price for that product would 
be the principal immediate consequence of the tariff. 

Page 388 

The former part is, perhaps, too strongly stated. The price may 
be fixed by cost at some point below the marginal significance of the 
stock of the single commodity. But, in so far as price is determined 
by significance or utility at all within the field of a single commodity, it 
is marginal significance or utility, not significance or utility in the 
particular case, which decides the matter. 

The real, true, ultimate marginal significance is that of the primary 
factors — those which constitute the source of all products. The laws 
of cost compel all specific significances, as well as all lesser marginal 
significances (those of particular classes of products) to yield to the 
domination of the true, final marginal significance. 

Page 391 
If we ignore the influence of disutility in limiting production, the 
causation of value in products must come from the side of demand, 



70 PAGES 391; 396; 399-400 

which means ultimately utility, capacity to satisfy wants. But obviously 
the utility of a cost-good or factor in production must be a derivative 
utility, a utility of something produced from itself, since it is not put 
directly to the satisfying of wants but only indirectly, that is, in the 
person of its products. Looked at l^roadly then, the process of causa- 
tion must be from products back to cost-goods, disutility being ignored. 
That is, between products as a 7chole and cost-goods as a whole causa- 
tion moves from the latter to the former. Now, however, if we are 
confining our attention to an individual product, the case is quite dif- 
ferent. Generally speaking, no single product can play so large a part 
in the utilization of given cost-goods that changes in the amount of that 
product produced can materially affect the value or price of the cost- 
goods involved. The producer of such product finds the prices of his 
cost-goods determined, approximately anyhow, in advance. He has to 
get a certain price for his product because it costs so and so much. 
Causation in the individual case, therefore, is from cost-goods to product. 



Answer : Greenbacks. 
Answer : Bank notes. 



Page 396 
Problem 1 

Problem 2 



Problem 3 
The new condition named would not have changed the answer to 
our problem. It is true that in this case two kinds of money fulfil the 
condition of being at par, but only one fulfils the condition of having 
its value determined independently of other moneys. This one was of 
course the greenback ; for the national bank note was held to its value 
merely by its redeemability in greenbacks and so was dependent for its 
value upon those greenbacks. 

Problem 4 
Bank credit or "deposit currency," so-called. 

Pages 399-400 
Problem 1 

(a) At the date named the United States overrated silver; for it 
treated silver as if it took only 15 grains of that metal to purchase one 
grain of gold, whereas, in reality it took more than this, i.e., 15.8 grains 
of silver to purchase one of gold. 

(b) Silver, being overrated, must have become standard money. 



PAGES 399-400: 402 



71 



Problem 2 

At the date named France also overrated silver ; for it treated 
silver as if it took only 15.5 grains of silver to buy one of gold, while 
in reality it took more than this, namely, 15.8 grains of silver to buy 
one of gold. So, also, silver, being the overrated money, must have been 
standard money. 

Problem 3 

Durijig the period named greenbacks were not redeemable in gold, 
consequently their value fell below that of gold. But, having become 
the cheapest money, they also became the standard money under the 
working of the principle. 

Problem 4 

Gold coin must have been standard money. By treating the gold 
guinea as worth 21 silver shillings, when in reality it was worth only 
20I/2, the mint overrated said gold money. But the overrated money 
always establishes itself as the standard money; hence, gold became 
the standard money. 

Problem 5 

In the panic weeks of 1837, bank notes were the standard money. 
A general suspension of specie payment had driven gold out of circula- 
tion, and had made bank notes practically a legal tender. Being also 
the cheapest of valid tenders, they became standard money. 

Page 402 
Problem 1 

The system described tended to establish 12.9 grains of gold, nine- 
tenths fine, as the ultimate money standard of the Philippines; for it 
tended to make two pesos worth one dollar, that is, to make one peso 
worth 50 cents, and the value of 50 cents is fixed by one-half of 25.8 
grains of gold, or 12.9 grains. 

Problem 2 

Under these conditions the ultimate money standard of Great 
Britain necessarily becomes 113 grains of pure gold; for, under these 
conditions, it is insured that the value of the gold coins shall be kept 
equal to the value of the bullion in them, that is, equal to the value of 
113 grains of gold. The reasons are plain. So long as there is free 
coinage, the coins can never rise in value above the bullion in them. 
On the other hand, so long as there is free melting of coin, the bullion 
cannot rise above the value of the coin. 



72 PAGES 402; 403; 411-412 

Problem 3 

The ultimate standard of the United States in 1830 must have been 
416 grains of standard silver. First, silver coin must have been the 
standard money, since it was overrated according to the mint ratio then 
in force. 

Secondly, since silver money was freely coined (substantially free 
melting may always be assumed), the bullion contained in said coin 
must have been the real ultimate standard. 

Problem 4 

The silver bullion contained in the French coin of one franc must 
have been the ultimate standard in France. First, under the ratio 
chosen, silver coin was overrated and therefore must have been standard 
money. Secondly, since their system was like ours, both silver and gold 
were freely coined, and so the silver coin must have had the same value 
as the bullion in it, that is, the bullion must have been the ultimate 
standard. 

Page 403 
Problem 1 

The ultimate standard of the United States between 1862 and 1879 
must have been greenbacks. That these were the standard money or 
the immediate standard has been already brought out. But they must 
also have been the ultimate standard, since they were not kept equal in 
value to any other particular object. 

Problem 2 

The ultimate standard of the United States during the panic of 
1837 was the bank note. As already seen in Problem 5, page 400, these 
bank notes were made standard money by the general suspension of 
specie payments. But, since they were not kept equal in value to any- 
thing outside of themselves, they must as well have been the ultimate 
standard. 

Problem 3 

On the hypothesis given, the ultimate standard for India must have 

.been substantially 6 1/6 grains of gold, 11/12 fine. For on that hypo- 

123.27 

thesis standard monev. silver rupees, was kept equal in value to > 

20 

or substantially 6 1/6 plus grains of gold. 

Pages 411-412 
Problem 1 

The silver coin naturally went out of circulation. 



PAGES 411-412 



1Z 



Problem 2 

The device employed by the Treasury was to issue the notes in the 
form of compound-interest-bearing notes, payable in three years, the 
interest also payable at the date of maturity but to be compounded every 
six months. As a result of these provisions, the notes steadily increased 
in value, and consequently were too good to pay out unless a premium 
was received. But, as we have already seen, premium moneys do not 
usually circulate, hence the note tended to go out and stay out of cir- 
culation. 

Problem 3 

Under the conditions named, the gold naturally went out of cir- 
culation. 

Problem 4 

The first provision would tend to secure contractility ; for it would 
make the getting of bank notes redeemed comparatively easy for people 
who wished this done. But getting the notes redeemed by the issuing 
bank would put them out of circulation. Device (b) would be still 
more potent, since it would increase the motives of banks receiving the 
notes of any other bank to send these notes home for redemption, that 
is, to insure their temporary retirement from circulation. Device (c) 
would work in the same direction, since the inability of a bank to use 
the notes of another bank as a part of its reserve would greatly increase 
its motive for returning these notes to the issuer. This especially applies 
to the state banks which do not themselves have the power of issuing 
notes, which, consequently, have no particular object in keeping the 
notes in circulation instead of sending them home, and so naturally 
follow the latter policy. Device (d) would operate in the same direction, 
since it would make the bank notes a less desirable form of money to 
have in one's possession, in that they could not be employed for this 
particular purpose. 

Problem 5 

It must have been gold money which left the country, for other 
nations will not receive from us moneys which have only a conven- 
tional, legal, or local value. Gold alone has in itself a guarantee of. its 
goodness. 

Problem 6 

The purpose of Congress was to keep the silver, in the form of 
certificates, out in the general circulation, in order to keep it away from 
New York City and the Federal Treasury. This device succeeded ad- 
mirably, because there is an almost unlimited demand throughout the 



74 



PAGES 411-412; 424 



country at large for small bills, and that demand easily absorbed all the 
available supply of silver certificates. In fact, the country has com- 
monly been ready to take a still larger quantity, and there was until 
recently an almost continual clamor from the l^ankers for more small 
bills, whether Treasury notes or bank notes. 

Page 424 
Problem 1 

The mint ratio used by France overrated gold, therefore made it 
the standard, sent silver to a premium, and consequently, under Corol- 
lary 5, drove it out of circulation. 

Probfem 2 

We should expect a net movement of money totcard Europe during 
The second quarter of the year, because at this time America is exporting 
a comparatively small amount of goods, while its imports are, if any- 
thing, larger than usual and its obligations on account of travel in Europe 
are increased, with the result that there is a balance of indebtedness 
against America in favor of Europe. On the other hand, there is 
naturally a net movement of money toward America near the end of the 
third and early in the fourth quarter, because at that time America's 
exports, which consist largely of agricultural products, have reached 
their largest amount, so that there is a balance of indebtedness against 
Europe and in fa«vor of America, which condition continues so long 
that it becomes practically necessary to send gold this way. 

Problem 3 

The author feels sure al)out this l)ecause of the corollary of Prin- 
ciple 2. A nation can never be despoiled of its money stock by an 
exchange drain, because the diminution of said money stock itself sets 
in motion the forces necessary to bring aliout a stoppage of said drain. 

Problem 4 

(a) Answer: $630.70. 

(b) Answer: $281.27. 

(c) This shows one of the reasons why we do not need to be 
anxious lest we should lose our money stock. The condition under 
which alone gold movements are possilole is one which is naturally self- 
destructive. In order that we should export gold at all, there must be 
a high rate of exchange — i. e., just as soon as the rate falls below $4.89 
and a fraction, any outward movement of gold must t:ease. But such a 
high rate of exchange tends to reduce itself; for it makes exporting 
particularly profitable, hence increases our exports, hence increases our 



PAGES 4i4; 435-437 75 

credits abroad, that is, makes the supply of exchange on Europe 
abundant, hence brings itself below $4.89 and a fraction. But, in thus 
destroying itself, the high rate of exchange takes away the condition 
necessary to gold exports, and so brings about a stoppage of those 
exports. 

Problem 5 
This movement is primarily brought about by the demand of the 
West for money to move its crops. The bankers, feeling this demand, 
order their New York correspondents to send them their balances in 
order that these may be ready for local use. This outward movement 
is probably also influenced by the fact that during the latter part of the 
summer the East is buying much of the West and therefore has an ex- 
change balance to meet. On the other hand, there is an inward move- 
ment toward New York during the late fall and early winter. The first 
reason for this is that the West no longer has uses for the money which 
it has drawn out early in the summer, and therefore sends it back to 
New York to swell its balances with its correspondents and to earn the 
one or two per cent interest which is commonly paid by New York banks 
on banker's balances. A second reason, probably, is found in the fact 
that, as the purchases made from the East for the fall and winter trade 
increase, the balance of trade begins to go against the West and so it 
has a balance of indebtedness to the East. 

Pages 435-437 
Problem 1 
The gentleman was confusing the price of money with its real 
value. Of course, the price of money could not change as long as it 
was used as the measure of values, since the measuring of anything in 
terms of itself gives us the same answer at all times. But this price of 
money, that is, this measure of money in terms of itself, gives us no clue 
as to the real value of money. Obviously, we must look around for 
some other object to measure the value of money by. The practice of 
economists and of people generally is to try to measure changes in the 
value of money by goods in general, which means by noting changes in 
the level of prices. If prices in general have gone up, this is understood 
to mean that money has gone down. If prices in general have gone 
down, this is understood to mean that money has gone up. Of course, 
an argument could be made for the contention that some other measure 
of value was a more legitimate one than goods in general ; but this is 
too deep a question for present consideration and was not involved in 
the remark made and quoted. As measured in the usual way, there 



76 PAGES 435-437 

could be no doubt that money had risen in vakie, that is, that the level 
of prices had greatly fallen since 1873. 

Problem 2 
During the first period, we had irredeemable paper money, a money 
which had no power to circulate outside of this country and hence con- 
stituted, as it were, a little reservoir of money altogether by itself, shut 
off from other bodies of money. As a consequence, any deficiency in 
this quantity of money could not be relieved by drawing money from 
other countries, other reservoirs ; and, on the other hand, any excess 
could not be relieved by a flowing out oi money from this country or 
this reservoir into other countries or reservoirs. Hence, Corollary i, 
Principle i, worked more effectively between 1862 and 1879 than it 
would have between 1850 and i860. (A great rainstorm falling on a 
body of water connected with the ocean cannot produce any appreciable 
effect upon its level. The same storm falling upon a small reservoir 
entirely shut off from other bodies of water would raise the level de- 
cidedly.) 

Problem 3 

(a) The free coinage of silver would not make an ounce of silver 
worth $1.29 as measured in the present dollar; for free coinage means 
nothing more than that the mint will give for 412.5 grains of silver an- 
other 412.5 grains of silver turned into silver coins, and this is not at 
all like the case supposed of buying eggs at a fixed price, and so the 
argument from analogy has no application here. In fact, such an ex- 
change as that described has no tendency to make the value of silver as 
measured in other things any higher than it was before. Of course, if 
the mints offered to purchase all the silver that came zvifli gold at the 
rate of $1.29 per ounce and carried out its promises, silver would at 
once go to that figure as measured in gold ; but nothing of the sort was 
proposed, and of course nothing of the sort was at all feasible. 

(b) The statement made by Mr. Bryan was true in this sense, that 
an ounce of silver would rise to a nominal value of $1.29. But of course 
this value would be the value of silver as measured in silver itself. 

Problem 4 
The fallacy consists in assuming that, in order to be able to pay the 
debts which may be in existence at any one moment, we need at some 
one time a quantity of money equal to the total amount of those debts. 
This is like imagining that, in order to have a music hall so made that 
an audience can be gotten out of it, the doors must be wide enough to 
let the whole audience pass out abreast. Just as the audience, in leaving 



PAGES 435-437 



77 



the hall, will pass out of the doors in succession, so the debts of a com- 
munity will be paid in succession. Hence, even if all settlements were 
made with literal money, a debt of almost any magnitude could be 
settled with a comparatively small amount of money. 

Problem 5 
(i) Yes, the Mexican dollar would have risen in value; for, when 
we say that silver is the standard, we mean that it determines the value 
of the dollar, that is, the dollar rises in value when the silver rises, and 
falls when the silver falls. 

(2) No, the silver dollar would not have risen in price; for silver 
itself is the thing in which values are measured when we are talking 
about prices, and of course the measurement of anything in itself can 
never change. 

(3) No. In making a certain amount of silver the determinant 
of the value of the unit, we thereby fix the price of silver bullion, and 
that price of course is unchanging until the law itself changes. 

Problem 6 

At the date named gold must have been the monetary standard of 
France. At the mint one ounce of gold was treated as if it were worth 
15.5 ounces of silver, while on the market one ounce of gold was worth 
only 15.3 ounces. Accordingly, the mint overrated gold and therefore 
made gold the standard. 

Problem 7 

No. The facts stated did not establish his contention. The needs 
which are developed during a panic are no clue to the needs of the 
country in ordinary times. Of course, our supply of money was insuf- 
ficient in the midst of the panic ; and so it would have been, if we had 
had four or eight or ten times as much money as we did have. It is 
characteristic of a panic that the ordinary substitutes for money are 
useless and that everyone who has any claim for money is demanding 
the realization of that claim at once. But such a demand cannot be 
met by the money ordinarily in use however great its quantity. For, 
whatever the quantity, the general price level will so adjust itself that 
said quantity is substantially all kept busy in ordinary times; and so, 
when an extraordinary increase in the need takes place, there is no 
surplus to meet it. Here, again, we can well use the analogy of the 
public hall. The fact that the exits of a theater are not adequate to 
take care of an audience which has been stampeded by an alarm of fire 
is no proof that those exits are not adequate on ordinary occasions. A 
very little reflection will show that it would be quite impossible, even if 



78 PAGES 435-437 

the walls of the room could be entirely taken out, to get a panic-stricken 
audience out without some persons being injured. 

Problem 8 

The fallacy consists in imagining that providing for the free coinage 
of silver at $1.29 an ounce when on the market it was worth only 65 
cents would double its z'aliic. Undoubtedly, such action would double 
the price of silver, that is, the value of silver as measured in money, for 
silver itself would then become the standard of valu» and would have 
whatever price the law gave it when that law fixed the amount of coin 
to be made out of one ounce. But this would bring no advantage to 
silver mine owners, since it would be Dwrcly a no)>iiiial advance in the 
price or value of silver, and so would be offset by the fact that the 
money received in exchange for the silver bullion would not go any 
further in buying other things than the smaller quantity of money which 
they formerly received for their silver went. Without much doubt, 
however, the silver mine owners would have made somewhat increased 
profits, because of free coinage, but for quite a different reason. Al- 
thougk the raising of the price of silver from 65 cents to $1.29 per ounce 
would b# merely a nominal advance in its value and not a real one, there 
would probably be some real advance, that is, some advance in silver as 
measured in gold, in those countries where silver was merely a com- 
modity; for the increased use of silver would naturally cause its 
marginal significance and its marginal cost to increase, and the real 
value of silver as measured in other things would rise. This rise 
would, plainly, increase the profits of silver mine owners. 

Problem 9 

Since the mint treated silver as if 15.5 grains of it were necessary 
to purchase one grain of gold, while in reality it took only 15.3 grains of 
silver to purchase one grain of gold, it underrated the silver, or over- 
rated gold. Tliat made gold the standard and sent silver to a premium. 
But money which is at a premium will not usually stay in circulation. 
Hence it was to be expected that silver five-franc pieces would dis- 
appear from circulation. People were therefore surprised when they 
saw someone offering these coins at a railway station to pay for a ticket. 

Problem 10 

A coin in active use is bound to be worn more or less. Further, 
more or less of the coinage is certain to be withdrawn from circulation 
to use in the arts and to send abroad in payment of foreign debts. But 
the gold which is withdrawn for either of these purposes is naturally 



PAGES 435-437 



79 



valued in proportion to its weight, and hence, for these purposes only 
full-weight coins are chosen. Consequently, whatever drain on the 
coinage arises from these causes will fall upon the full-weight coins 
rather than upon those that are short in weight, leaving the latter to 
continue in circulation. This tendency will be strengthened by the fact 
that those who have th« short-weight pieces are likely to lose upon them 
if their defectiveness is observed, and this is likely to be the case if they 
are taken to banks where the least ground for doubt causes the coins to 
be weighed. Hence ordinary persons will usually be careful to pass on 
worn coins as promptly as possible. In a word, worn coins will have 
more than the average tendency to circulate constantly, while full-weight 
coins will from one cause and another have more than the average 
tendency to be withdrawn; and the result will be the progressive de- 
terioration of the total coinage. If. however, the government redeems 
all worn coins at their face value, people will not hesitate to bring in 
even the inferior coins and have those recoined, since this procedure 
does not involve them in any loss, as it would if the government did 
not pursue this policy. 

Problem 11 
First, we do not even immediately pay for what we buy abroad by 
sending out money. On the contrary, payments for imports are com- 
monly made either with drafts, or by accepting bills drawn by the seller 
of the goods. Secondly, this will not commonly mean the sending out 
of money even in the long run, since in the long run we will in our turn 
be selling goods to outsiders, and the credits thereby created in our favor 
will be used to offset the credit against us which has already been brought 
into existence. 

Problem 12 

(a) Most of the silver coins went out of circulation because, under 
the conditions named, gold became the standard, since it was the cheaper 
of the two metals; silver, consequently, went to a premium; and premium 
money, as we remember, tends to go out of circulation. 

(b) Some of the silver coins, however, remained in circulation be- 
cause they were so much worn that they were still worth more as money 
than as bullion, and hence it was not profitable to melt them. 

Problem 13 

In saying that our mint ratio between silver and gold was 15.98 to I, 

it is meant that the mint puts into a certain number of dollars' worth of 

silver coin 15.98 times as much metal as it does into the same number of 

dollars' worth of gold coin. It does not mean, as we not infreque4itlT 



8o PAGES 435-437; 441 

read, that the mint would exchange the metals at this ratio, that is, that 
the mint would give you, for a certain quantity of gold, 15.98 times as 
much silver, or vice versa. The mints made no such exchange. 

Problem 14 
Yes, this was normal. At this season of the year the moving of the 
crops is about over, and the need of the West and interior generally for 
extra supplies of money has largely disappeared. The money, therefore, 
is being sent back to the centers, particularly New York, to increase the 
balances of the country bankers with their New York correspondents; 
also to earn the 2 per cent which is conunonly paid by the New York 
bankers for bankers' balances. 

Problem 15 

Yes, this was normal. At this season of the year Europe is buying 
very largely of America, and so the obligations of Europe to America 
are greatly in excess of the obligations of America to England. In con- 
sequence, gold very naturally flows this way. 

Page 441 
Problem 1 

It would not be unreasonable to suppose that of this $1,500 net re- 
turn, 6 per cent of $3,000, that is, $180, should be thought of as interest 
upon the money which Mr. Crane has invested. Again, $120 might be 
looked upon as true profits, that is, the return received by Mr. Crane 
for assuming the responsibility of this business. Finally, the remainder, 
that is, $1,200, may be looked upon as wages earned by Mr. Crane in the 
capacity of manager, bookke'eper, salesman, and so on. 

Problem 2 

It probably would not be wildly unreasonable to suppose that $35 
of this total sum would have to be given to the government by way of 
taxes; $15 might be assigned to wages of management; $60 to repairs 
and replacement; $80 to economic rent; and $170 to what is, in the nar- 
row sense, interest. 

Problem 3 

The different elements entering into this sum are: (i) interest on 
the investment in the plant; (2) repairs and replacement; (3) profits on 
the investment as a return for taking responsibility; and (4) the wages 
paid for the labor necessary to manage the business. Probably the latter 
constitutes the larger part of the $1.50. 



PAGES 441; 446 8l 

Problem 4 

In working out a theory of production, we are trying to learn the 
processes through which, and the principles under which, the different 
factors are brought together to produce an output of product. In work- 
ing out a theory of distribution, we are trying to learn the processes 
through which, and the principles under which, the output of product is 
allocated to the factors which were brought together to produce it. 

Page 446 
Problem 1 

Conceivably the shares of the social income going to individuals 
might be determined by direct assiginiiciit through some public authority, 
in accord with some accepted formula of justice or expediency. Presum- 
ably this would be largely true under communism and somewhat less so 
under socialism. Under the present order, however, the immediate 
avenue through which a share in the social income is derived is the con- 
trol of some factor of production, a condition which of course requires 
the consent and support of public authority; and the amount of the share 
thus derived is determined, not directly by authority, Init by the value or 
price of the service of the factor controlled. But the values or prices of 
factors are determined under the same principles as those which deter- 
mine values or prices in general. In turn, these principles constitute the 
most important part of that division of economics most commonly called 
Exchange. It follows that it is not unreasonable to treat the chapters 
devoted to the subject of distribution as really a part of Exchange ; and, 
in order to differentiate these somewhat from the more general part of 
the subject, it is not unreasonable to label them Exchange-Distribution. 

Problem 2 

The solution of the problem of distribution which is characteristic 
of current economics makes the share of each owner of a factor depend- 
ent on the functioning of that particular factor; either (i) he gets what 
the functioning of his factor adds to product (the productivity theory), 
or (2) he gets what expresses the effective or marginal importance of 
the function of his factor (Taylor). But, immediately, either of these 
solves our problem only for the factors or their functions. It answers 
the question: How much will be credited to factors or functions? rather 
than the question: How much will be credited to persons? In order to 
cover the problem of personal distribution, the account of functional dis- 
tribution needs to be supplemented, first, because the same person may 
have control of more than one kind of factor and so may receive more 



8^ PAGE 446 

than one type of income, and secondly, because persons may obtain a 
share of the social income from sources other than economic ones: fraud, 
corruption, theft, etc. We do not have a full account of distribution till 
we include the effect on the sharing of the social income due to these ex- 
traneous elements, elements not provided for in a study of functional dis- 
tribution. 

That this point does not need elaboration is perhaps sufficiently evi- 
dent from its very nature. We all know something about the non-eco- 
nomic sources of personal shares, and know that society spends much 
effort trying to reduce their influence in determining the general result. 
Doubtless those officials whose duties include carrying out this social task 
need to make a careful study of the extent, the causes, and the best 
methods of correcting this evil. But there is little of interest to the gen- 
eral student which is not sufficiently obvious to everyone. 

Problem 3 

The doctrine of this text with respect to the price of any primary 
factor, and therefore with respect to the share of the product going to 
the owner of such factor, is that said price tends to approximate a price 
which expresses at once the marginal utility or importance of said factor 
and the marginal disutility of supplying it, in case there is such a dis- 
utility. In recognizing the influence of disutility, our doctrine justifies 
the contention — if not stated too absolutely — that "the natural laws 
regulating distribution assign to each owner of a factor of production 
that portion of the product which is economically necessary to evoke and 
maintain the efficient operation of his factor." But, because it recognizes 
the influence of utility or importance as well as that of disutility, it also 
justifies the contention chat "the natural laws of distribution assign to 
each owner of a factor of production that portion of the product which 
is economically necessary to" insure that the supply of his factor shall 
be most advantageously utilized. 

Now, it is assumed in the problem that this account of the matter 
fairly represents orthodox doctrine ; and I believe this is true. Further, 
if either half were to be omitted as of limited application and even un- 
sound, I fancy it would be the one which recognizes the influence of dis- 
utility or pain-cost. That is, if I were trying to put into a single expres- 
sion the gist of orthodox teaching and felt at liberty to omit either half 
of the doctrine brought out, I should choose the one which represents the 
system of distribution as being one which is necessary to insure tlic most 
adz'antagcous utilization of factors. But, however this may be, it surely 
is true that, in affirmino- a doctrine which recognizes the joint influence 



PAGES 446; 455 83 

of both disutility or pain-cost and utility, we implicitly admit that it is 
quite possible that the natural laws regulating distribution should "assign 
to each owner of a factor of production" a portion of the product which 
is ill excess of that "which is economically necessary to evoke and main- 
tain the efficient operation of his factor"; we admit, in other words, that 
each owner of a factor may get a surplus over the least he would consent 
to take. This, of course, grows out of the fact that the first extra-mar- 
ginal demand price may be higher than the marginal supply price — the 
lowest price which sellers will consent to take — in which case said first 
extra-marginal demand price, rather than the marginal supply price, will 
set the lower limit of price; and consequently the actual price of the 
factor, the share of the product going to its owner, will necessarily be 
greater than what would be required "to evoke and maintain the efficient 
operation of his factor." • 

Problem 4 
We do not say that. Instead we say ; "Each of us tends to get an 
income which expresses the marginal significance of his type of service." 
We might change the part after "expresses" to this : "the effective sig- 
nificance of his service," for his "effective" significance is the same as 
the "marginal significance of his type of service." 

Pages 455 
Problem 1 

No. Since, by hypothesis, competition is free and general conditions 
normal, the rate of wages prevailing, that is, $1.50 per day, would doubt- 
less express approximately the contribution made by the marginal 
laborer. That is, for some purposes anyhow, the utmost which employers 
could pay for labor would be $1.50. If, now, the law should raise the 
minimum to $5, employers would be obliged to dismiss those laborers 
who did not produce $5 worth, and so, many persons would be thrown 
out of employment. 

Problem 2 

The respect wherein this way of putting the matter is erroneous is 
in the fact that it makes bargaining the process by which fair wages are 
reached; whereas economists have usually taught that competition among 
employers is the process which would tend to insure fair wages. 

Problem 3 

Great Britain was anxious to secure great efficiency in the produc- 
tion of munitions. Exceptional profits in this field was the condition most 
likely to accomplish this end. Taxation of these profits might easily be 
placed so high as to kill the goose that laid the golden eggs. 



84 PAGES 460: 463; 469; 475 

Problem 1 

(a) 20 times 4 cents, or 80 cents. 

(b) 20 times 7 cents, or $1.40. 

Problem 2 
Rent is a price (value) phenomenon; it comes to exist because the 
scantiness of the possible output of product over against the great demand 
for that product makes the value of that product higher than cost. If 
nature were as liberal with land-power or capacity as she is with air, 
there would be no rent. 

Page 463 
Problem 1 

Rent is due, as so often noted, to the limited capacity of the land 
over against the demand for products — a shortage of land capacity. 
Such shortage could exist if the lanct were all of one grade, as was 
brought out under the first hypothesis. 

Problem 2 

The necessary shortage in land capacity would come sooner with a 
given population, if only a part of the total outfit of land were of high 
grade. 

Page 469 
Problem 1 

In the fact that the price of such a house has to be higher than it 
would be if only its cost in materials and labor were taken into account. 

Problem 2 
In that said hire has to be a larger sum than it would be if only the 
cost in labor and materials of constructing, maintaining, and replacing 
the house were taken into account. 

Problem 3 
In that the price of said site is smaller than the sum of the series of 
rents which will be received from it in the future. 

Problem 4 
Same as Problem 2. 

Page 475 
Problem 1 

Those who deny the productivity of capital mean that there is no 
product in addition to the product which should be imputed to nature 
and labor; for the capital itself is nothing more than a congelation, so to 
speak, of nature and labor. Thus, when our fisherman, instead of using 
the whole of his labor in directly catching fish, devotes a portion of it to 



PAGE 475 85 

producing a net, and then uses the rest of liis labor and the net in catch- 
ing fish, these fish, though in a sense the immediate product of the net 
itself, are after all the product of the labor and nature back of the net; 
so that there seems to be really nothing here producing fish except nature 
and labor. Now, what the economist has to explain is the fact that, in 
spite of all this, the product is not credited wholly to nature and labor 
(or capital as congealed labor), but that a portion of it is credited to 
capital as capital. We think that this can be done and has been done; 
but it cannot be done by the very easy process contained in the sentence 
quoted. 

Problem 2 

(a) Answer: 43. Each day's catch on the new plan represents two 
days' labor, one making the net and one using it. If, therefore, capital 
as capital, in other words, the capitalistic method, is to have any credit, 
each day's catch on the new plan must exceed the old catch of two days, 
i.e., 42 fish, by at least one fish, that is, must be 43 fish or more. 

(b) Answer: 4,740 fish. If he could catch with the aid of the net 
200 fish each day, then in 30 days he would catch 30 times 200, or 6,000 
fish. But, in the 60 days devoted to producing the net and fishing with 
the net, he could have caught 60 times 21 fish, or 1,260 fish. The supe- 
riority of the net method, then, will equal the difference between 6,000 
and 1,260 fish, or 4,740 — the maximum amount which could ever be 
credited to the capitalistic method as such, that is, to the net as capital. 

(c) This amount, 4,740 fish, would all be credited to capital as 
capital, provided that (i) this number or more were demanded at a 
cost price equivalent to one twenty-first of one day's labor; (2) that 
there was but one net; and (3) that no more waiting power was avail- 
able to permit the making of other nets. Under these conditions, fisher- 
men would tend to bid against each other for the use of the net until 
they had turned over the whole surplus to t*e net-owner. 

(d) If, in fact, only 1,000 fish were actually credited to the net, we 
could explain this by saying that the quantity of capital had been so much 
increased, it had been put to marginal uses so low, that the significance 
of the amount necessary for a net was no greater than that of 1,000 fish; 
and that therefore the net-owner was obliged to be satisfied with 1,000 
fish out of the 4,740 which the use of the net had added to the catch. 
Economists who believe that the disutility of supplying capital influences 
the rate of interest would count that element also as an item in bringing 
about the result in question. 

(e) If there were adequate motives for accumulating waiting power 



86 - PAGES 475; 487; 502 

to an amount in excess of all the needs therefor, the net-owner would 
get only such a proportion of the catch as was necessary to remunerate 
the labor required to make the net at the current rate of wages. 

Problem 3 
I think not. The real question is this: If capital had no disutility 
cost, could its amount be sufficiently limited to insure that it would have 
marginal utility or productivity — that there would still be opportunities 
to increase productive efficiency by a resort to more roundabout methods? 
I think such limitation is theoretically possible. The possible supply of 
capital is limited by the following facts: (i) The total income, which 
it could never exceed, is limited. (2) The share of income which could 
be devoted to the future is less than the total, since something must be 
given to the present if we are to continue to live. (3) Of possible grati- 
fications which are otherwise equal, the present ones outweigh in our feel- 
ings those of the future — depriving the present for the sake of the future 
involves a sacrifice, a disutility. The third is the one which by hypothesis 
has disappeared. Would not the first and second prove sufficient to insure 
the requisite limitation on the supply of waiting power? I think so. 

Page 487 
Problem 1 

Chinese immigration would tend to lower the standard of living in 
this country, and so tend ultimately to lower the rate (jf wages. 

Problem 2 
This is a direct deduction from the corollary. Since wages must, in 
the long run, emijody the standard of living demanded by the class to 
which the laborer belongs, therefore, we can hope to raise wages, in the 
long run, only by raising this standard of living. But, again, this raising 
of the standard of living can be accomplished only through the ideals 
and habits of the people, haiice the proposition. 

Problem 3 
The policy in question tends to raise the laboring man's estimate of 
what the minimum standard ought to be, so that, in so far as his estimate 
determines the rate of wages, that rate tends to be raised Ijy the policy in 
question. 

Page 502 

Problem 1 

The proper test of an alleged function of any particular agent in 

the productive process is this: Can any person other than the agent in 

question perform the function in question? If the answer is yes, the 



PAGE 502 87 

alleged function is not the true, distinctive function of said agent; if the 
answer is no, then said function is anyhow one function of said agent. 

As applied to the case in hand, if any person other than the entre- 
preneur can perform the function of management in whole or in part, 
then, so far as this is possible, management is not a function of the 
entrepreneur. But, as everyone knows, management can be, and com- 
monly is, delegated in large measure to salaried laborers. Management 
ill general, then, cannot be looked on as the function of the entrepreneiii . 

It seems plain, however, that some slight amount of managerial 
functioning has to be left to the entrepreneur, at least deciding what 
agents — officers and boards — shall exercise authority in determining the 
general policies of the business, and appointing the chief administrators. 
To a very limited extent, then, management is one of the functions of the 
entrepreneur. It follows, also, that to that extent profits may be described 
as wages of management. 

The question still remains whether this is a complete account of the 
matter, whether there is any other function necessarily reserved for the 
entrepreneur — and so a necessity for some broader statement as to the 
nature of profits. The text has developed a much more distinctive func- 
tion, and one which better suggests the business point of view, namely, 
assuming the responsibilities of production, including the risk of losing 
one's capital. Obviously, this function in its fulness cannot be delegated 
to any person other than the owner of the business, individual or cor- 
porate. It therefore must be included as a distinctive function of the 
entrepreneur. It follows also that profits must, anyhow, include some- 
thing more than wages of management, namely, payment for assuming 
I he responsibilities of production. 

As applied to the corporate entrepreneur, the "wages of manage- 
ment" idea is particularly inappropriate, since such an entrepreneur 
simply is obliged to delegate managerial function to his agents ; that is, 
it is not possible for him, as entrepreneur, to perform the managerial 
function in any full sense. 

Problem 2 

First, there is no such fund. Secondly, in large measure, the losses 
are not covered at all : many entrepreneurs fail altogether of recouping 
themselves. Doubtless this element of insurance is to a limited extent 
present in the case of the successful entrepreneur, in that he sets his 
minimum at an average return on the capital, looking on the small returns 
or even losses of a lean year as something to be offset by the exceptional 
gains of a fat year. But, in the main, he has to be paid more than the 



88 PAGES 502; 537; 538; 543; 548; 553 

mere lender of an equal amount of capital, because only so can he be 
adequately rewarded for his additional sacrifices of risk-taking, respon- 
sibility-bearing, etc. 

Page 537 
The man who gets profit has to undergo the risk sacrifice; the inter- 
est receiver escapes this. The sacrifice of the former is thus greater and, 
besides, of a kind which, in most people's minds, is more deserving of 
remuneration. 

Page 538. 
The sense of a public interest, the respect for law and order, the 
willingness to forego the indulgence of violent passions were greatly 
lacking; society was all the time near anarchy; to maintain government 
was extremely difficult. To enlist the sup])ort of the strong men of the 
community by the means indicated was almost indispensable. 

Page 543 

This calls for little more than a resume of considerations bearing on 
the matter in question, which considerations are presented in various 
parts of the text, including Chapter XLVH. (See pages 101-104; 114- 
121; 537-540; 554-557-) 

Page 548 

This may be true, because the efficient functioning of the executive 
may be conditioned on his having the outing in question, and his func- 
tioning efificiently may l)e more important from the social standpoint 
than the laborer's protection from the weather's cold. (See Note 10, 
Appendix.) 

Page 553 
The former reason is a worthless one in that it is based on the view- 
point of generic rather than effective importance. (See discussion in the 
text, pages 3-4.) 



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